Indemnity vs Reimbursement: Navigating Long-Term Care Insurance Choices

When you buy a long term care policy, your benefits will be paid out using the indemnity or reimbursement method.

Comparing reimbursement and indemnity payouts in long-term care (LTC) insurance involves understanding their distinct characteristics, advantages, and disadvantages. Both types are designed to offer financial support for individuals requiring long-term care, but they operate differently. It is important to understand them when deciding which LTC policy to buy.

Indemnity Policies

Characteristics:

• Indemnity policies provide a selected daily benefit amount as soon as the policyholder qualifies under the claim, regardless of the actual cost of care.
• Benefits are paid when the insured is unable to perform two out of six "activities of daily living" (ADLs).
• These policies offer flexibility in using the benefit amount.

Pros:

• Flexibility in spending: Policyholders receive a set monthly amount and can spend it as they wish, as long as it is long term care related (including house improvements for LTC).
• Broad scope of use: Funds can be used for traditional care services or family members providing care.
• Potential for saving: If monthly expenses are less than the maximum benefit, the difference can extend the benefit period.

Cons:

• Higher upfront costs compared to reimbursement policies.
• Capped benefit duration: Many policies offer coverage for up to about eight years.
• Tracking of receipts for IRS purposes.
  • You need to make sure the expenses are qualified long term care expenses.
  • Benefits above the allowed per diem are taxed by the IRS.

Reimbursement Policies

Characteristics:

• These policies reimburse the policyholder for actual expenses incurred up to the policy limit.
• They are specific to qualified medical services and require filing claims and submitting expenses for reimbursement.
  • An exemption to this is if your carrier offers a concierge program where they pay the licensed caregivers or facilities directly. Then, in that case, you do not need to worry about tracking and filing claim for reimbursement.

Pros:

• Direct coverage of expenses: The plan covers the costs of qualified long-term care services.
• Applicability for professional services: Useful in situations like assisted living or skilled nursing facilities.
• Lifetime benefits: Some policies offer benefits for the policyholder's lifetime, crucial for long-duration conditions like Alzheimer's.
• Could also include benefit for house improvement for LTC purposes.

Cons:

• Limited service scope: Cannot use benefits for non-professional, informal care.
• SOME reimbursement policies' process requires upfront spending and waiting for repayment. This is not an issue with a concierge program.

Considerations for Choice

1. Location and Caregiver Choice:
   • Urban areas with many care options might favor reimbursement policies.
   • Rural areas or those seeking ultimate flexibility might prefer indemnity policies.
2. Cost and Coverage Duration:
   • Indemnity policies are more expensive but give you a sense of control and flexibility.
   • Reimbursement policies provide more benefit for the premium but are less flexible.
3. Policyholder's Lifestyle and Needs:
   • Those desiring more control over how they use their benefits may find indemnity policies more suitable.
   • If the primary concern is covering specific long-term care costs, reimbursement policies might be more appropriate.

In summary, the choice between indemnity and reimbursement policies hinges on individual needs, preferences for care flexibility, and financial considerations. Indemnity policies offer more freedom in using benefits but at a higher cost and with a capped duration, while reimbursement policies are more focused on covering specific qualified expenses and might offer longer-term coverage.

One stark difference between the two is that indemnity policies allow you to pay your family member for taking care of you and reimbursement policies do not. A common misconception about reimbursement policies is that you need to track and submit receipts after paying your caregiver: that is not the case with a concierge program. Another common misconception is that you can spend the money from an indemnity policy as you wish. Yes - but only if it is for LTC related expenses. Otherwise, that would be between you and the IRS. Again, we are not lawyers or accountants here.

This is why it is important to work with an independent insurance broker that can give you both options and discuss these choices is detail. Want to learn more? or are you a financial advisor and would like to dig deeper about this topic? email us at contact@peachinsurance.net