LTC Insurance Benefit Models Indemnity v. Reimbursement

LTC Insurance Policy Evolution

The first LTC insurance policies in the 1970s reimbursed only nursing home expenses.  Policies evolved to add home health care in the 80s & 90s.  Next came life insurance policies with LTC expense reimbursement options.  A more recent change to the tax code has enabled insurers to develop ultra-flexible products that pay tax-free cash indemnity benefits directly to policyowners, up to at least the HIPAA per diem rate ($420/day in 2023).  If the actual LTC related expenses are higher than the HIPAA per diem rate, those can also be taken out of an insurance policy on a tax-free basis.

Modern Policy Options

A few insurers still offer traditional reimbursement LTC insurance policies.  However, they have largely gone out of favor because their premiums cannot be guaranteed, policies may never result in a claim, and they only reimburse professional services or institutional expenses.

Most LTC insurance benefits bought today are built into life insurance policies or annuities.  Premiums can be guaranteed to never go up.  Both indemnity and reimbursement benefit models are offered by highly rated mutual life insurers.  Cash values from older policies, without LTC benefits, can be rolled into modern life insurance policies with LTC features, tax free.  Policies can be designed to cover an individual or a married couple.  All are designed to pay benefits during the insured’s lifetime, and/or to beneficiaries at death.  A benefit will be paid.  The question is how and when.  No more use it or lose it!

Benefit Payment Models

The biggest difference among LTC-flavored life insurance policies is how they pay benefits.  Cash out indemnity policies pay full policy proceeds directly to the policyowner.  Reimbursement policies reimburse expenses paid for professional care at home or in an institutional setting.  Policy buyers need to have a clear understanding of each policy type, because of the significant differences in when policy benefits are paid, how much is paid, and how policy proceeds can be used.  For a deep dive into the pros and cons of each benefit payment model, and how they interact with HIPAA per diem rates, please see Nationwide’s excellent in-depth analysis.

In Favor of Reimbursement Policies

Because reimbursement policies only reimburse actual LTC expenses provided in a formal setting, claims tend to start later and be smaller.  This enables insurers to design lower cost policy options.  In settings where informal care is unlikely, why pay potentially higher premiums for flexibility that is unlikely to be relevant?  Think of a single individual without children.  Would a reimbursement benefit policy make more sense, if the policy has a lower premium?

In Favor of Cash-Out Indemnity Policies

Cash out indemnity policies pay full cash benefits directly to the policyowner.  Because insurers expect to pay larger claims, sooner, cash out indemnity policies often – but not always – charge a higher premium.  Keep in mind, only cash out indemnity policies pay benefits to cover informal care provided by family.  Also, the claims experience is much simpler – there is no need to file expense reports to get reimbursed for professional services.  If the cost of a cash out indemnity policy is similar to a reimbursement policy, even if informal care is unlikely, would the convenience of a monthly check, no questions asked, be preferable?

Second Most Important Decision

Given that about half of us will require long term care, the most important decision we make is to buy insurance that covers LTC.  The second most important decision is to determine which benefit model makes the most sense, based on our circumstances, relative to the premium cost.  Understanding the pros and cons of both options, and thinking ahead to the most likely claims experience, is key to making the right LTC policy choice.