How much is a care home annuity?

If you have to pay care home fees yourself, taking an annuity can help you cover the costs involved. An annuity provides a guaranteed stream of income in exchange for a lump sum payment. Buying a care home annuity gives you the assurance that your care home fees will be paid for the rest of your life, and you won’t need to dip into your pockets.

The cost of a care home annuity depends on several factors, including your age, health, the level of income you require, and the cost of care in the care home you reside in. Generally, older individuals will pay a lower cost than younger individuals. Also, the higher the income you will need, the higher the cost of care home annuity. The cost of a care home annuity can range from tens of thousands of dollars to several hundred thousand dollars.

What is a care home annuity?

A care home annuity is also referred to as an immediate care annuity. It is a type of annuity product that is purchased from a third party to help individuals pay for their long-term care in a residential care home or nursing home. A care home annuity provides a guaranteed income in exchange for a lump sum payment.

The annuity makes regular payments i.e. monthly, quarterly, or other periods, and you can use this income to pay for long-term care. The income from the annuity is tax-free if it is paid directly to a registered care provider. The amount of annuity payments depends on several factors, including the annuitant's age, health, and the cost of care in the residential care home.

How a care home annuity works

A care home annuity is designed to provide individuals with regular payments to cover the cost of long-term care in a care home. This annuity is suitable for individuals with health issues or already receiving care in a residential care home or at home.

When you purchase a care home annuity, you are required to make an upfront lump sum payment. The amount of the lump sum payment depends on the annuitant’s age, health, and the cost of care at the care home or home where they live. For example, if you are in poor health, you can expect to pay a lower lump sum payment given the duration of time you will need to pay for care compared to an individual who is in good health.  

In exchange for the lump sum payment, the annuity provider will provide the annuitant with a regular income for as long as they remain in the care home. The amount of payments will be determined by the terms of the annuity contract, and the income may change depending on the annuitant’s health or cost of care. If the health deteriorates, the annuity provider may increase the size of payments to help cover the cost of care.

Some annuities may provide protection from inflation by adjusting annuity payments for inflation. This means that payments will increase over time with rising inflation, to help the annuitant cover increasing care home costs.

Who is eligible for a care home annuity?

Eligibility for a care home annuity depends on several factors, including the individual's age, health, and the cost of care in the care home where the individual resides. A care home annuity is considered appropriate for individuals who require long-term care in a residential care home or their own homes.

Generally, a care home annuity may be a good option for individuals with several needs. Primarily, this annuity is well-suited for individuals with restricted financial resources who may not be able to bear the expenses of long-term care. Individuals with substantial care needs and require constant assistance with daily living activities such as eating, bathing, and dressing may find care home annuities to be a suitable option. Additionally, individuals who do not have alternative forms of long-term care insurance in place to cover the cost of care may also find care home annuities convenient for their needs.

Pros of care home annuities

Individuals with long-term care needs may benefit from care home annuities in several ways. Here are some of the benefits of care home annuities:

Guaranteed income

A care home annuity provides individuals with guaranteed income for the rest of their lives to cover the cost of care. This gives the annuitant and their family peace of mind, knowing they will have an income to fund home care fees.

Inflation-adjusted income

Some annuities may offer protection against increasing care home costs by adjusting payments to keep up with inflation.

No risk of outliving the income

A care home annuity guarantees you payments for the rest of your life, regardless of how long you live and the amount of care costs you need.

Tax benefits

If the annuity pays out the care costs directly to the residential care home, the payments will either be tax-free or subject to lower income tax rates than other forms of income. However, the care home must be registered with the appropriate state regulatory bodies to receive these tax benefits.

Capital protection

Some annuities allow annuitants to make a one-off payment to purchase a guarantee known as capital protection. If you die earlier than expected, your family will receive a lump sum death benefit.

Cons of care home annuities

High cost of lump sum payments

Care home annuities require a large upfront payment, which can be a big financial burden to most individuals. Families may be forced to sell their treasured assets to be able to afford the lump sum payment. 

No inheritance

If you die soon after purchasing the care home annuity, your estate won't receive a refund of the lump sum you paid. However, you can purchase capital protection to guarantee a refund of a portion or all of your lump sum payment.

Limited flexibility

Once you purchase the plan and you have gone past the allowed cancellation period, you cannot change the annuity contract or get access to the lump sum payment.