Benefits will be tax free if paid direct to the care provider for an annuity purchased for immediate long-term care needs. The annuity must have qualified as an immediate needs annuity when it was taken out. So, in other words, the benefits from an ordinary purchased life annuity cannot be paid tax-free purely because they are being used to fund long-term care.

If any part of the annuity benefits are paid to anyone other than the care provider, or for any purpose other than for the care of the person protected under the policy (including payments that may be due on the death of the protected person), the interest element of that section of the benefits is taxable. Where an immediate needs annuity is generated on a ‘life of another’ basis, the benefits can still be paid tax-free, provided that they are paid directly to the care provider and are used solely for the care of the person protected under the policy.

If the long-term care policy is prefunded, benefits are also tax-free. So, for example, where there is no annuity but, instead, premiums are paid to an insurance firm out of tax-paid income to insure against possible future occurrences for prefunded long-term care policies, benefits can be paid direct to the care provider or to the person protected.