How Annuities Handle Disability and Long Term Care

Annuities are retirement-oriented contracts between insurance companies and individuals. The nature of their commitment demands that insurance companies exert control over the funds entrusted to them. They do this by levying surrender charges on the full or partial withdrawal of funds by annuityholders. These charges severely limit the liquidity of annuities as investments.

Unfortunately, life sometimes presents us with circumstances requiring a sharp reversal of course. Disability and submission to long-term residential care are two such circumstances. Annuity contracts often recognize and provide for such adverse events by including provisions that allow penalty-free access to funds.

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Waiver of Surrender Charges

By far the most common benefit accorded the disabled and confined is the waiver of surrender charges. It is found wherever surrender charges are levied, which means that it is offered in both fixed and variable annuity contracts. The idea behind this benefit is to remove penalties on withdrawals for annuityholders who suddenly, and through no fault of their own, need access to the funds tied up in the annuity. The waiver may apply to partial or full withdrawals, or both. The surrender charge is usually fully waived, but might be only reduced. The waiver will typically not apply immediately upon policy issue, but only after an interval (say, 90 days).

The waiver is a benefit of the annuity contract. Most commonly, it is a policy condition, which means that its terms appear in the contract and its cost is factored into the administrative charges levied by the policy. However, it may be an option, which is a benefit commonly available to policyholders upon their selection. (This is comparable to an option on a new car, such as GPS, which the buyer is allowed to purchase.) In this case, the cost should be specified. Alternatively, the waiver may be added to the contract as a rider, which will probably require calculation of the cost by the insurance company’s actuaries.

Waiver of Premium

Annuities can be either single-premium or installment premium contracts. Single-premium contracts are purchased with one payment. (This is not synonymous with an immediate annuity, since a single-premium annuity can also defer distributions for years.) Most installment premium contracts are flexible-premium; they allow the holder to choose the amount and timing of contributions to the annuity. Scheduled-premium annuities, which specify the amount and timing of contributions, do exist, however. A benefit of such contracts can be the waiver of premiums in the event of disability or confinement to long-term care.

The waiver of premium benefit is more common among investments where premiums are routinely scheduled, such as life insurance.

The Annuity Disability Benefit

Of all the adverse events covered by annuity-contract waivers, disability is the most frequent. Perhaps not coincidentally, it is also the least frequently covered in standard annuity contracts. The leading research organization specializing in insurance and annuities, Beacon Research, has periodically surveyed annuity contracts over the past decade. In two surveys, disability-related waivers were found in about 2% and 6% of contracts, respectively.

The precise terms of the waiver vary significantly between companies and contracts. The most significant difference concerns the definition of disability. The more restrictive definition requires that an annuityholder be unable to work in any occupation, while the less restrictive is an inability to perform his or her current occupation. Often the condition of disability is tied to an external standard; the most common is the federal Social Security Administration standard of disability. The stipulation that a beneficiary cannot simultaneously receive earnings from the covered employment also derives from that source. An “elimination period” or waiting period after the onset of disability may also be stipulated. The holder’s physician is required to certify the disability, and the company frequently reserves to right to demand a confirming examination by its own physician.

Just as health insurance is often invalidated by the presence of a pre-existing condition, the disability waiver will not apply if the annuityholder was certified as disabled or receiving disability payments at the time the annuity was purchased. Lastly, it is common for the company to list allowable reasons for disability in the contract. Illness and bodily injury are customarily allowed, for example, while depression is seldom recognized.

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The Annuity Long-Term Care Benefit

Annuities do not normally recognize long-term care per se. Instead, the analogous benefit is a waiver of surrender charges for confinement to a nursing home or equivalent facility. (This is not the same thing as long-term care, which can be provided in the home.) Examples of comparable facilities include hospitals, convalescent care facilities, and hospices. Surveys identify confinement benefits as the most common or second-most-common waiver benefit offered in annuity contracts. Once again, the specific terms of the waiver vary by company and contract.

Here, the most significant difference is in the qualifying term of confinement. This ranges from 60 to 180 days; 90 days is typical. Requirement that the facility be licensed or certified is standard. Once again, confirmation of the annuityholder’s status by the attending physician is required and the insurance company may want its own physician to examine the holder.

Other Waiver Benefits

Other important benefits are the waiver of surrender charges for the death or terminal illness of the annuityholder. The death waiver, in particular, ranks very high in frequency-of-appearance in annuity contracts. (On the other hand, death is much less likely than disability to occur during the surrender-charge period.) As with other waiver benefits, these require certification by physicians. Sometimes the waiver for terminal illness will be subsumed inside a confinement waiver designed to apply primarily to the terminally ill.

Read the Fine Print – and the Bold Print, Too

The first and most important thing to do with any contract is to read it. This goes double for annuities. Waiver benefits vary so much and so minutely by insurance company and contract that it is unsafe to assume anything. Insurance companies and contracts are regulated at the state level and benefits available in some states may not be available in others. If anything in the contract is unclear or absent, ask an insurance-company representative for clarification.

If You Want It, Why Not Ask For It?

Another famous maxim is that everything is negotiable. This also applies to annuity contracts. Since so many different types of waiver benefit are or have been offered by insurance companies, there is a decent chance that a particular one can be written into the contract as a rider even if it does not appear as a policy condition or an option. Providing your intentions are honorable and you have no hidden agenda, why not ask for something that is not originally offered?


Waiver benefits are commonly offered in annuity contracts. The most valuable of these, waiver of surrender charges for disability, is the least-often offered. Long-term care waivers are offered for confinement to a licensed or certified facility such as a nursing home, hospital, convalescent-care center, or hospice. In these and other cases, the precise terms and conditions of the benefit vary according to the insurance company and the contract. Common elements include confirmation of the qualifying condition by outside physicians and insurance-company doctors and the pre-existing absence of the qualifying condition.

The wide variability of terms and conditions for these benefits highlights the importance of reading the annuity contract. Benefits not provided as policy conditions or options may be available as riders. When in doubt about the meaning of the contract or availability of benefits, always ask an insurance-company representative or your financial advisor for clarification.

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