Indemnity LTCI Policies: Useful Planning Tool With Limited Availability

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Home health care services are a valuable benefit for many long-term care insurance (LTCI) claimants. But finding a nearby agency can be a challenge in rural areas, making the services less readily available. In those circumstances, LTCI policies with indemnity benefits can make sense, according to Pat Bradley, CLU, ChFC, a principal with LTCI Partners in Lake Forest, Illinois.

The value of flexibility

Indemnity provides more flexibility in these cases, primarily for home care, he notes. Costs are largely fixed at health care facilities so both indemnity and reimbursement policies will pay the same amount, but home care costs and the providers of those services can vary, which increases the value of an indemnity policy’s flexibility.

“You can pay an informal caregiver, you could pay a friend or a family member to help take care of you when you don’t have a readily available home health aide because of your location,” Bradley says. “I think one of the big pluses with indemnity is that ability to use informal caregivers.”

This flexibility also could cover unanticipated costs that a reimbursement policy might not. Agents and insureds don’t know “what types of services might come along that we aren’t even aware of today,” he says. A reimbursement policy might not cover the cost of such services, “but if you had indemnity, you’ve got the cash in hand to do what you want with it,” Bradley adds.

William Borton, CLU, RHU, a managing principal with W.R. Borton & Associates LLC in Marlton, New Jersey, agrees that insureds’ desire to have a family member provide care is an argument in favor of indemnity policies. In addition, wealthier clients often do not want strangers coming into their homes and may prefer to hire family.

Another reason that indemnity policies are becoming somewhat more common is because more people are retiring outside of the United States. “The reimbursement contracts pay, if they pay at all, they pay for facility only and [have] much more limited benefits when you’re international,” Borton explains. “But if you have an indemnity product, once you meet the definition of their chronic illness, the money just starts flowing regardless of where you are. You could be sitting under a palm tree sipping a tropical drink with an umbrella and having money direct-deposited into your bank account.”

Limited availability

Indemnity contracts’ flexibility surpasses their availability, however. Bradley notes that none of the traditional LTCI contracts offer a full indemnity provision although a few have a limited indemnity feature.

“You can take a limited benefit in lieu of your reimbursement and that’s 30 or 40 percent,” he explains. “You can take that in cash instead of taking your reimbursement benefit for that month.”

The logic behind insurers’ reluctance to issue indemnity policies is straightforward, he says: “It’s more expensive because they’re paying out the full benefit every month.” Borton agrees with that assessment and says insurers’ actuaries point out that indemnity products tend to have much higher loss ratios.

Borton cites several workarounds for acquiring indemnity coverage but stresses that they’re not perfect solutions. Section 101(g) chronic illness riders on life policies are indemnity benefits that can help clients who cannot buy LTCI. Section 7702B(b) riders provide an LTCI benefit, and a small number of insurers provide those funds as an indemnity benefit, he says. One reason behind this policy design is to gain a competitive advantage in cases where the insurer doesn’t sell LTCI. Consequently, those issuers lack the LTC underwriting and claims administration capacities of LTCI carriers.

Evaluating the trade-off

Given these drawbacks, should prospective LTCI buyers insist on a reimbursement product? Borton says that insureds should get maximum leverage for their LTCI premiums and traditional coverage with reimbursement benefits best fills that role. It becomes a question of whether the applicant is willing to give up a “significant amount of leverage in return for indemnity,” he says.