Do I need Inflation Protection?
It is no secret that there are high costs associated with long-term care today. Nursing home costs average between $80,000-$100,000 per year and the average duration of care is about 3 years. Take those to variables and you are looking at a potential $300,000 out of pocket expense, assuming you do not require care for longer than the assumed 3 years. In addition to this long-term care costs in general continue to increase at a 3%-5% rate per year! The issue with this is, most individuals purchasing long term care insurance today wont need to make a claim for at least another 10-15 years or longer. So now your once adequate daily benefit amount, no longer stacks up against the drastic rise in overall long-term care costs over the past 10 to 15 years ,and this is where inflation protection comes into play.
You will want to ensure your policy features at least a 3% compound inflation protection feature to help account for steadily rising costs. This inflation protection will also increase your benefits each year whereas, a policy without inflation protection will decrease in value as costs increase. There are actually various forms of inflation protection available and determining the best one for your policy is crucial to you.
Simple Versus Compound?
Simple inflation forms interest only on the original daily benefit amount, most commonly seen at 5%, and is most appropriate for those aged between 60-70’s. Compound inflation builds interest on your interest and is most commonly seen at 3%! Compound inflation increases your benefits at a faster pace than simple interest would . With more time compound inflation will provide a larger increase in benefits than simple inflation would. If you predict your claim is over 20-30 years away this may be the best option for you.
Things to Note
Many policies do not feature built in inflation protection and simply offer the option to purchase more. You will see this often with group employee policies and this “purchase more” option should not be confused with automatic inflation protection. Purchasing coverage with inflation protection is a must in order to address the rising costs of care! When selecting an inflation protection plan it is important to understand each option and the effects it will have on your individual policy.
If you or someone you love is interested in Long Term Care or Long Term Care Insurance be sure to visit: LTC TREE for more information.