Basic Formats of Long-Term Care Insurance

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Long-term care insurance policies may be either reimbursement or indemnity policies. In this article, we will learn the advantages and benefits of both.

Reimbursement Policies

This is the most common form of long-term care (LTC) policy sold today. The insurer creates a pool of funds from which your actual covered expenses are paid as the bills come in. The insurer calculates the size of that fund by multiplying the maximum daily benefit by the maximum benefit period in days. In other words, the size of the pool is determined by how much you can get each day and for how long you can get it. That sum, or pool, represents the maximum lifetime benefit available under the policy. This is not always clear from the way many LTC insurance policies are presented.

Reimbursement policies are the most common form of long-term care policy sold today.

If you are considering a typical reimbursement policy, for example, that provides a maximum daily benefit of $200 and a maximum benefit period of two years, you would have a total pool of funds available calculated as follows: 365 days x 2 years x $200 per day = $146,000.

If a portion of the $200 is not used on any day, it remains in the pool of funds to reimburse the cost of future covered services. Those services do not have to be provided within two years. The funds are available until completely paid out for covered services.

Example: Sally has chosen a reimbursement LTC policy with a $200 maximum daily benefit and a maximum benefit period of three years. After the elimination period (if any) has passed, this policy will reimburse Sally a maximum of $219,000 for whatever covered expenses are actually incurred (1,095 days x $200/day = $219,000).

Some reimbursement policies do not create a "pool of dollars." In this situation, any part of the maximum daily benefit that is not used to reimburse you for covered expenses on a given day becomes unavailable. For example, if you have a policy daily benefit of $200, but only $150 in expenses today, the $50 that was not needed today is gone. This arrangement is found mostly in older policies.

Indemnity Policies

Indemnity policies pay the full daily amount for each day regardless of actual expenses once you have been declared eligible and remain eligible for any covered benefit. Eligibility is determined as it is for reimbursement policies.

Example: Dennis purchased an indemnity LTC policy with a $200 maximum daily benefit, and a maximum benefit period of three years. After the waiting period (if any) has passed, this policy will pay Dennis $200 for every day that he is eligible. His actual bills might be more or less than $200 per day, but the total would not matter to the indemnity insurer. Like Sally, Dennis would have a maximum of $219,000 available, but his benefits would all be paid in $200 increments.

The choice between reimbursement and indemnity policy design is probably not the most critical in the insurance purchase decision, but it can be important.