Long-term care insurance: Reimbursement or cash benefit?

Shopping for long-term care insurance involves a wide range of decisions. What company will you purchase your insurance from? How much coverage do you need? What riders will you add to your coverage to customize it to meet your needs? 

But, there's one overreaching decision that's just as important as all of those above - if not moreso. Will you purchase a reimbursement policy or a cash benefit policy?

With a reimbursement policy, your long-term care insurance provider will reimburse you for the cost of your care up to your benefit cap. So, if you pay $2,000 for an licensed home health aide, your reimbursement policy will offer a $2,000 reimbursement. With a cash benefit policy, you'll receive your cash benefit as long as you are on claim (once a licensed physician certifies your need for care), regardless of what services you use. So, if you purchase a $4,000 monthly cash benefit, and you need long-term care, you'll receive a check for $4,000 per month regardless of the type of care you use. 

Of course, there's a tradeoff to consider between the two. While cash benefit policies give you more access to your benefits and more freedom with regard to how you can use them, reimbursement policies are typically the less expensive option. So, which is better for you? That's what we will break down below.

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Long-term care insurance: Reimbursement or cash benefit?

There are pros and cons to reimbursement and cash benefit policies. For example, if you choose the reimbursement option, you can rest assured that you can afford your future care, and the cost of your insurance may be lower than the cost of a cash benefit policy. Moreover, reimbursement policies are typically tax qualified - meaning you won't pay income taxes on your benefits. 

On the other hand, cash benefit policies give you more options in terms of how you'll use your benefits when you need them. And, these policies usually provide 100% of your benefits in cash while you're on claim. But, "oftentimes they do require higher premiums for this increased flexibility," explains Jaime Mueller, CLTC, corporate vice president and long-term care product leader at the insurance company, New York Life. Moreover, you may have to pay income taxes on any portion of your benefit that you don't use to cover a qualified long-term care expense. 

So, which of these long-term care insurance policies is better? "Choosing the right type and amount of long-term care coverage will depend on each individual's financial circumstances and needs," says Mueller. 

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When a reimbursement policy is better

If you need the lowest-cost long-term care insurance, a reimbursement policy may be the best option for you. These policies typically offer lower premiums than cash benefit policies. 

A reimbursement policy may also be the better option if you're only interested in long-term care from licensed providers. "With a reimbursement policy, you turn in the receipt or bill you received, and the insurance company will reimburse your expenses you incurred," explains Rhonda Bills, instructor at Certification for Long-Term Care, an education company that certifies long-term care insurance agents. "It is important to note, most companies will want to require the receipts you turned in are from professionally licensed caregivers." Those often include home health aides, nursing homes and assisted living communities. 

Finally, a reimbursement policy is typically the better option if you want to make sure that your benefits are tax-free. Since these policies typically only pay for qualified long-term care expenses, you generally won't have to pay income taxes on any portion of the benefits you receive. 

When a cash benefit policy is better

In some cases, a cash benefit policy may be more fitting. In particular, if you want to pay informal caregivers - like your family or friends - for your care, a cash benefit policy may be in order. If you'd like to use your benefits for non-qualified long-term care expenses "cash benefit would be better since if there are any extra funds, you could use them for maintenance or prescription costs or deductibles not covered," explains Steve Azoury, ChFC and owner of the financial planning firm, Azoury Financial.

A cash benefit policy is also typically better if you want to receive 100% of your benefit value each month, rather than a reimbursement of the cost of the services you use. However, with reimbursement policies, if you don't use your full benefit each month, you'll typically extend the number of months you have coverage. That's not the case with a cash benefit policy since you receive your full benefit in cash each month. 

It's important to consider cost, too. Ultimately, a cash benefit policy is only better under the above circumstances if you can afford the premiums these policies come with. And, those premiums can be meaningfully higher than traditional reimbursement policy premiums. "A policy's premium should never change your lifestyle," explains Bills. "It needs to be comfortable in your budget."

The bottom line

Whether a reimbursement long-term care insurance policy or a cash benefit policy is best for you depends on your budget and plan for aging. If you plan on using formal care and need the lowest premiums possible, a reimbursement policy may be what you're looking for. If you don't mind paying higher premiums in exchange for a policy that gives you unlimited options for how you'll use your coverage once you've made a claim, a cash benefit policy may be more fitting. Talk to a long-term care insurance expert about your options now.