As people age, certain tasks become more difficult, and health concerns multiply. Some illnesses may be short-lived, but other conditions may linger or become long-term issues. The Pennsylvania Health Care Association estimates that 70 percent of people turning 65 will need long-term care during their lives.

The average annual cost for a private room in Pennsylvania nursing home is $116,800, though it varies by region. On average, people need long-term care for about three years. That means the typical need for long-term care will add up to more than $350,000.

Though you planned for retirement, you may not have realized how expensive long-term care is, particularly in Pennsylvania. A comprehensive estate plan should factor in how to pay for long-term care costs. Purchasing an annuity is one to handle those costs.

How does an annuity work?

An annuity is a contract between you and your insurance company meant to help pay for long-term care costs. You pay a lump sum, and the insurance company pays you back in installments throughout your life. There are two kinds of annuities: an immediate annuity and a deferred annuity.

Immediate annuity

With an immediate annuity, you start to receive payments from your insurance company right away. Your current health does not affect your ability to get an immediate annuity. Your payment amount will depend on how much you paid in, as well as your age and gender. Women’s annuity payments are typically lower and last longer because their life expectancies are longer.

An immediate annuity should not interfere with your ability to receive government benefits like Medicaid. However, there is not guarantee an annuity payment will be enough to pay for long-term care. Rising costs and inflation can affect this.

Deferred annuity

With a deferred annuity, you pay into an account, and you will not be able to access the funds immediately. With some deferred annuities, you may be able to access some, but not all funds right away. You will also receive a monthly payment, when the account has reached maturity or at the agreed upon date.

The downside of a deferred annuity is may affect your ability to receive funds from Medicaid. Like an immediate annuity, there is also no guarantee it will cover all your long-term care expenses.

With a deferred annuity, you may be able to pass on the unused portion to your heirs. Generally, annuities can reduce taxes, but depending on your assets and the annuity you purchase, the tax implications can be complex. Before you purchase a long-term care annuity, you may want to consult an attorney that specializes in estate planning.