How do you plan to pay for long-term care for yourself or a loved one? If the prospect of nursing home, home health care, assisted living, or similar custodial care is staring you in the face, you have several choices to pay the associated expenses.

You could pay-as-you-go, keeping your assets in low-paying certificates of deposit, savings accounts, or money market accounts. You could hope you need skilled care so Medicare will pay the bill—assuming you meet some very restrictive criteria, including 72 hours in the hospital first. You could bankrupt yourself in hopes Medicaid would pay your bills. You could buy long-term care insurance to pay the bills if you're still insurable. Or, you could take many of your cash equivalent assets (CDs, bonds, money markets, savings accounts) and other poorly performing assets (some stocks, etc.) and use them to buy an annuity.

If you want to provide an income stream for the rest of your life, there are several types of annuities to consider. Since we're looking at a near-term need for long-term care in this article, the two plans that probably make the most sense are the Single Premium Deferred Annuity (SPDA) or the Single Premium Immediate Annuity (SPIA).

SPDA

The SPDA allows you to contribute significant assets, in a single payment or a very short window, to an annuity. You can then let the money continue to grow at a minimum guaranteed interest rate that is well above that of a comparable duration CD. While your money is growing, your taxes are deferred. Once you decide to take the money, what we call annuitizing your annuity, you will receive a guaranteed payment every month for the rest of your life, or for whatever period you choose. Even better, you can choose payment options that will make sure payments continue to be made to your designated beneficiaries for a specified period of time after your death. Note that when you take annuity payments you only owe taxes on the part that is assumed to be interest. There is a formula for this that prorates the total interest across each payment.

SPIA

The difference between a SPDA and SPIA is simple—the SPIA begins making annuitized payments to you immediately after it is established. Otherwise the principles are the same.

Why Chose a SPIA or SPDA?

The biggest reason is the guaranteed income for whatever period you choose. That means the money you need to pay long-term care expenses is available, and if you don't need long-term care, the money still belongs to you. You can even use the annuity payments to pay long-term care insurance premiums. In addition, as long as you have started taking payments before you need long-term care, you may qualify for at least partial Medicaid benefits if your income is not enough to pay the bills in a long-term care facility. Once you begin receiving annuitized payments, Medicaid may require you to apply those payments towards long-term care costs, but probably cannot make you give up the annuity._[1]

So start putting those low-returning assets to work in something with a guaranteed rate of return, tax benefits, and more. And while you're at it, you can greatly increase your ability to pay for your long-term care needs while preserving your income and assets.

_[1] Note that Medicaid planning, qualification, and so forth is a very complicated area of financial and tax planning. There are many legal issues, too. Always discuss this annuity option and its ramifications with a qualified tax professional, attorney, and your financial advisor. There are many regulations to prevent Medicaid fraud and abuse.

Liquidated earnings are subject to ordinary income tax, may be subject to surrender charges and, if taken prior to age 59 1⁄2, may be subject to a 10% federal income tax penalty.

Guarantees and payment of lifetime income are contingent on the claims paying ability of the issuing insurance company.

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