Long-Term Care Insurance — Reimbursement vs. Cash Indemnity Insurance – Which is Better?

Long-term care insurance benefits are pretty similar today – policyholders who can’t perform 2 of 6 activities of daily living or have cognitive impairment will get benefits that will pay for either care at home or in a care residence. Plans pay either a daily or monthly maximum up to a benefit limit that may or may not increase over time with inflation, and some products offer lifetime benefits.

The big difference in how benefits are paid out has to do with whether the benefits are paid on a reimbursement or cash indemnity basis.

A reimbursement plan is more common. Under this plan, bills and receipts are submitted to the insurance company, which then reimburses the facility, healthcare professional or policy owner directly for the qualifying long-term care expenses, up to the limit of the monthly long-term care benefit. Reimbursement plan benefits are received tax free.

With a cash indemnity plan, a check is mailed to the policy owner each month for the full amount of the monthly long-term care benefit. The money can be used for individualized care needs which could include expenses that might not typically be associated with long-term care, such as lawn maintenance or prescription drugs not covered by other insurance. Some of the benefits paid under a cash indemnity policy are received tax-free but some benefits may be taxable.

In order to receive cash indemnity benefits, policyholders who qualify just have to be receiving some type of informal care – but this could be provided by family members, such as a spouse or adult child.  The fact that the insurance company will pay even when the family is providing the caregiving is a very important and critical benefit, because often the spouse or adult child is going to be losing some income in providing the care.  Most reimbursement plans will not allow the spouse or adult child to be paid for providing care.

Why are cash indemnity benefits for informal care so important?  Because studies show that almost 3/4 of people would prefer to receive care at home – and that is exactly where informal care takes place.  The same studies show that less than 10% of people at home receive all their care exclusively from paid help. 

The lesson – even if you have a long-term care reimbursement policy you’ll probably still be getting informal care from a loved one who may have to interrupt their life and career to help.  It is estimated that the opportunity cost to informal caregiving in the U.S. is $522 billion.

Therefore, with the increased use of home health care, owning a policy that pays cash for informal care can be a huge help.  Some long-term care policies offer a cash indemnity benefit. Even some reimbursement polices offer a choice at the time a claim is made to get a percentage of the long-term care benefit as cash.

So, how much more do cash indemnity plans cost?  It depends. A good rule of thumb is that cash indemnity policies will cost about 20% more than comparable reimbursement plans. 

Is that worth it? Assuming that at the time care occurs there will be costs associated with informal care, buyers need to decide if they want to pay now through higher premiums or deal with the consequences of informal care later.

Written by Legacy Planning Law Group

Legacy Planning Law Group is dedicated to working with individuals and families to help protect the assets they have built throughout their life, and make everything simpler for families who have lost a loved one. We help thoughtful people achieve the peace of mind that comes with planning their personal legacy and passing on family harmony.

Written by Legacy Planning Law Group

Legacy Planning Law Group is dedicated to working with individuals and families to help protect the assets they have built throughout their life, and make everything simpler for families who have lost a loved one. We help thoughtful people achieve the peace of mind that comes with planning their personal legacy and passing on family harmony.