Cash vs. Reimbursement Long-Term Care Insurance

Benefits from a long-term care insurance policy can be paid out by using a cash indemnity or reimbursement method. The benefit amount choices range from $50-$500/day or $1,500 to $15,000/month, depending on the insurance company.

Cash indemnity policies

Cash policies pay the maximum daily or monthly benefit once the policyholder is on claim, regardless of care costs. For example, if you have a monthly benefit of $6,000, but you only incurred $4,000 worth of care expenses, the insurance company would still pay you the full $6,000.

No bills or receipts need to be submitted to the insurance company to collect monthly benefits.

Cash policies offer a tremendous amount of flexibility.

The insurance company places no restrictions on how your monthly benefits are used and who you can pay for your care needs that may not typically be associated with long-term care. For example, you can spend your benefit dollars to pay for home maintenance or buy prescriptions that your other insurance policies won’t cover.

You can even pay informal caregivers like a family member or friend to provide care, while reimbursement plans only pay for care provided by licensed professionals.

Benefits are received tax-free up to limits. The 2021 limit is $400 per day. However, if your actual expenses paid for care are greater than the limits, then it would all be tax-free.

Reimbursement policies

Reimbursement policies reimburse the policyholder for qualified long-term care expenses, but not to exceed the daily or monthly benefit. For example, if you have a monthly benefit of $6,000, but you only spent $4,000 worth of qualified long-term care expenses, the insurance company would reimburse you for $4,000, not the full $6,000.

Bills and receipts must be submitted to the insurance company and only actual costs are reimbursed. Many insurance companies will work directly with the facility or home care agency and are able to direct bill them for care expenses.

Licensed providers are required which means you cannot pay informal caregivers, like your family member or friend to provide care.

A benefit of having a reimbursement policy is that there is an audit trail of care expenses. The claims specialist can make sure money spent on care is qualified and you aren’t being overcharged by a facility or home care service.

Benefits are received tax-free.

Most insurance companies offer reimbursement only, while only a few companies offer cash indemnity. Some reimbursement policies offer a choice at claim time of getting either a portion of your monthly benefit in cash like 30% or receiving the full amount using the reimbursement method.

If you don’t use your full daily or monthly benefit, most companies will allow the amount you did not use to be carried over, which extends your benefit period. For example, if your monthly benefit amount is $6,000 and your care expenses are only $4,000, the remaining $2,000 stays in the total pool of money and extends your benefit period.

The Bottom Line

When choosing a policy, be sure you know how the insurance company pays out, using a cash indemnity or reimbursement method.

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