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What is a long-term care insurance cash policy?

Long-term care insurance cash policies may give you more flexibility in terms of how you can use your benefits.  Getty Images

Have you thought about purchasing long-term care insurance? With most American retirees needing long-term care at some point in their retirement, it's important to plan for the cost of that care. And that care isn't cheap. Though long-term care insurance can help cover that cost, different policy types may do so in different ways. 

With more than one type of long-term care insurance to choose from, it's important that you purchase a policy that meets your needs. And, if you're looking for a policy that gives you the most flexibility in the types of care you receive and how your benefits are used, a long-term care insurance cash policy may be what you're looking for. But what exactly is a long-term care insurance cash policy and how does this policy differ from traditional long-term care insurance options?

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What is a long-term care insurance cash policy?

Long-term care insurance cash policies, also commonly called cash benefit policies, cash indemnity policies or cash disability policies, are a form of long-term care insurance that provides a predetermined daily or monthly cash benefit while the insured party is in need of care (up to the policy's coverage cap).

Traditional policies typically either pay qualified care providers (like nursing homes or home health aides) directly or reimburse you for the money you pay to those providers. Since long-term care insurance cash policies pay a set amount of cash per day or per month when you need long-term care, you have more flexibility in determining the type of care you'll use your benefits to pay for.  

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How does a long-term care insurance cash policy work?

Long-term care insurance cash policies work just like traditional long-term care insurance policies in many ways. When you purchase either type, your premiums and ability to qualify will be affected by your age, health status and other factors relating to the risk the insurance company accepts when writing your policy. Both of these policies also help pay for the high cost of long-term care if you need it. 

However, there are also significant differences to think about. 

Most traditional long-term care insurance policies either reimburse you for the cost of your long-term care or pay your care providers directly. However, long-term care insurance policies with cash benefits usually pay the policyholder a preset cash amount for each day they meet the benefit trigger (whether they receive paid care or not on those days). That's an important difference for a few reasons. 

"Cash indemnity benefits in LTC insurance policies provide a tremendous amount of flexibility and simplicity at claim time versus reimbursement benefits," explains Kelly Augspurger, CLTC, CSA, and trainer for Certification for Long-Term Care, a firm that provides certifications for long-term care insurance agents. 

That flexibility is especially important for those who want to age at home and depend on informal caregivers (like family members or friends). "With cash benefits, you can pay whoever you want: family members, friends, neighbors, professionals, etc. Heck, you can even pay robots in the future, if they provide care! This means you have the flexibility to pay formal and informal caregivers," says Augspurger. 

Long-term care insurance policies with cash benefits may make it easier to receive your benefits, too. "Cash benefits also simplify receiving benefits because they send you your full monthly benefit, regardless of care expenses, and don't ask for evidence of your care expenses," Augspurger says. 

Also, a cash benefit policy could provide supplemental retirement income beyond the cost of your long-term care. For example, say your monthly insurance benefit is $6,000, but you only need $5,000 per month in care. "With cash benefits, the insurance company will send you the full $6k," says Augspurger. "However, reimbursement policies will only reimburse up to your monthly benefit. In the example above, the insurance company will only reimburse you $5k."

So, in the above example, a cash benefit long-term care insurance policy could add $1,000 in supplemental income to your monthly budget once a long-term care event takes place. 

Then again, there are a couple of caveats to consider before you choose a cash benefit long-term care insurance policy: 

  • Policies with cash benefits may have higher premiums than reimbursement policies. 
  • You may have to pay income tax on any cash benefit you receive that you don't use to pay for qualified long-term care services. 

The bottom line

Choosing between a cash benefit and traditional long-term care insurance policy can be difficult. While cash benefit policies may be more expensive and can come with tax implications, they usually give you far more flexibility in how your benefits can be used than traditional policies. If you're not sure which policy type is right for you, reach out to a long-term care insurance professional now to discuss your options.

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