When considering reimbursement and indemnity policies, it’s important for consumers to know the potential surprises.
Imagine you’ve just made the difficult decision to move into a nursing home or have your loved ones take over as your caregivers and decision-makers. The last thing you’d want to focus on at that moment is keeping up with payments, due dates and potential taxes.
There’s a discussion happening in the insurance industry right now about long-term care benefits and the pros and cons of two payment types: reimbursement and indemnity.
- Reimbursement option reimburses policyholders for qualified long-term care expenses incurred each month. Under these policies, a care provider can bill the policyholder’s insurance company directly, or the policyholder can pay for long-term care expenses out of pocket and submit receipts for reimbursement.
- Indemnity option involves insurance providers sending a pre-determined monthly payment to the policyholder, regardless of the price of any care provided. The individual needs to receive qualified long-term care services to qualify. The policyholder then uses that money to pay for care directly.
According to 2022 research by Lincoln Financial Group, nearly half (47%) of US adults surveyed already are or anticipate becoming adult caregivers in the next three years[i]. With long-term care on the minds of so many Americans, it is important that people are aware of the distinction between reimbursement and indemnity. However, indemnity policies are not always fully understood by consumers or advisors. These policies are not as simple as receiving a check in the mail and can, in fact, lead to additional responsibilities and expenses for insureds and their loved ones. The most notable frustration could come in the form of additional taxes owed.
Tax considerations
Reimbursement and indemnity policies differ in their tax-filing requirements. While reimbursement policies do not require tax filing by the insured, a person receiving indemnity benefits is required to file IRS Tax Form 8853 to account for their long-term care benefits.
Given the amount of time, attention and effort required to be a caregiver, a policyholder might want to pay their loved one for their caregiving services. Under an indemnity policy, paying an informal caregiver more than $2,400 a year makes the insured an employer and the caregiver a household employee, according to IRS. This means, if an indemnity policyholder wants to pay a loved one to be a caregiver, they will be subject to all the requirements of being an employer, which includes compensation tracking and reporting, as well as paying Social Security and Medicare taxes. These payments also create taxable income for a policyholder’s caretaker that will have to be accounted for during tax season.
IRS per diem limit
The potential tax burden under an indemnity policy does not end there. Each year, the IRS sets a per diem limit on long-term care benefits. In 2023, the per diem is $420 a day. Policyholders with indemnity plans are subject to those limits while care received above the per diem limit under a reimbursement policy is not. If, for example, care for an indemnity policyholder costs $500 per day, they will be taxed on the additional $80 whereas, under reimbursement, the entire $500 per day is tax-free.
Care manager or bill payer?
Next is a question of how policyholders and their loved ones want to spend their time after enacting a long-term care plan. With reimbursement plans, caregivers or policyholders can authorize the insurer to pay bills directly, or they can be reimbursed for care if they prefer. On the other hand, an indemnity policyholder receives a check and is responsible for tracking payments and paying bills for any care provided. This places an additional burden on policyholders and their loved ones during an already challenging time.
Potential for fraud
When an indemnity policyholder receives a cash payment, this opens the door for money meant for long-term care services to potentially be misused. Because of this risk, policyholders could face higher scrutiny from the IRS and be required to provide receipts and prove how the money received is being used to cover qualified long-term care services. With a reimbursement policy, policyholders are either reimbursed or have their bills sent directly to the insurer, which creates a paper trail.
The bottom line
Both indemnity and reimbursement payment options have their benefits; however, it is important for consumers to understand any unintended – and less publicized – downsides of indemnity payments. Just remember – if it sounds too good to be true, it usually is.
Indemnity policies might seem like plans that simply send a check in the mail for policyholders to use as they please, but these policies may come with several potential concerns for consumers. Reimbursement policies, meanwhile, allow policyholders to turn care management over to the insurer, offering consumers additional peace of mind. Instead of tracking bills and due dates, filling out additional tax forms and potentially incurring taxes, those using reimbursement can focus on spending quality time with the ones they love most.
About the author
Heather Deichler is Heather Deichler is SVP of MoneyGuard Business Management at Lincoln Financial Group. In this role, Heather’s responsibilities include product management, product development, underwriting, new business, competitive intelligence, and LTC (Long Term Care) wellness solutions. Before joining Lincoln, Heather was head of Long-Term Care and Linked Benefits Product, Marketing, Communications and Strategy for New York Life. In that role she was responsible for managing the long-term care solutions product portfolio, which includes standalone and linked-benefit solutions, overseeing career agent, marketing, strategic planning, and strategic partnership oversight. Over the course of her career at New York Life, Heather also held leadership roles in the company’s Group and Worksite business, Group Membership Association department, International division, M&A, and Corporate Owned and Bank Owned Life Insurance products. Before joining New York Life, Heather was employed by a law firm specializing in municipal law, public finance, and corporate governance. Heather holds a Bachelor of Arts in economics from Vassar College and a law degree from Pace University.
Lincoln Financial Group
Lincoln Financial Group is the marketing name for Lincoln National Corporation and its affiliates.
Lincoln Financial Group® affiliates, their distributors, and their respective employees, representatives and/or insurance agents do not provide tax, accounting or legal advice.
Please consult an independent advisor as to any tax, accounting or legal statements made herein. Lincoln MoneyGuard® products are universal life and variable universal life insurance policies with long-term care benefits issued by The Lincoln National Life Insurance Company, Fort Wayne, IN, or in New York by Lincoln Life & Annuity Company of New York, Syracuse, NY.
[i] A Special Report from Lincoln Financial Group’s Consumer Insights Research featuring: CivicScience, Caregiving, July 2021, Lincoln Financial, Consumer Sentiment Tracker, May 2021 and Long Term Care Insurance Sentiment & Barriers to Purchase, October 2022.
