Long Term Care Insurance Inflation protection is the most important option to have in an LTC policy. This important benefit is optional so you have to ask for it. It increases your daily or monthly benefit amount each year to keep pace with inflation and the increasing Long Term Care expenses. Simply put, this rider is the “engine of the car” and will ensure your benefits have kept pace with inflated Long Term Care costs.
With most policies, even though your benefits are increasing each year, your premium does not automatically increase when you add the automatic Long Term Care Insurance Inflation protection rider. However, it’s important to know that rates can go up over time but any increase must go through the state insurance department.
Common Long Term Care Insurance Inflation Protection Choices
- 5% Compound Inflation Protection (Ages under 75)
- 3% Compound Inflation Protection
- 5% Simple or Equal Inflation Protection (Ages 75+)
- Consumer Price Index (CPI)
- Future Purchase Option
The Main Long Term Care Insurance Inflation Protection Options
Long Term Care Insurance policies will grow your benefits using either simple or compound rates. Virtually every policy offered through LTC Tree includes all Long Term Care Insurance inflation protection options.
5% Simple or Equal Long Term Care insurance protection:
If you’re over 75, Simple inflation protection may be a good fit, but it depends on your family’s longevity. With simple inflation protection, your benefit increases by the same dollar amount each year. A $100 daily benefit increasing 5% per year will increase by $5/day per year. In 20 years, you’ll see your benefit amount double with simple inflation protection.
Simple Inflation Protection Math: $100 base + ($5 x 20 years) = $200.
5% Compound Long Term Care Insurance Inflation Protection:
If you’re under 75, it used to almost always a “no brainer” to add a 5% compound inflation rider, but things have changed as the price of 5% guaranteed benefit increases has risen over time. With 5% compound inflation protection, your benefits will increase each year by a higher dollar amount than simple. A $100 daily benefit, for example, will become a $265 daily benefit in 20 years.
Compound inflation protection can make a big difference in the amount of benefit you can receive over the years. If your life expectancy is beyond 15 years, it is typically better to go with 5% compound inflation protection. However, if your life expectancy is 15 years or less, you might want to consider 5% simple or equal inflation protection because it will be less expensive.
Future Purchase Option:
A future purchase option is an inflation protection usually offered by the Long Term Care Insurance company every three years with an existing policy. Future Purchase Option, or Guaranteed Purchase Option plans are common with group long term care insurance plans and can be a disaster for you financially, especially if you’re younger. What can be tricky is that if you turn down the option (which means you’ll pay more) to increase your benefit, you may not be offered the option again. You’ll be stuck with a lower level of coverage for the rest of your life.
3% Compound Inflation Protection:
An attractive balance of price and benefit increases may often be found with the 3% inflation protection option. Be mindful in selecting these lower rates, however, because the difference between 5% compounding and 3% compounding will be significant in 25+ years. These types of inflation protection might be a better fit only for people who buy Long Term Care Insurance in their 60’s.
Consumer Price Index (CPI):
One last type of inflation protection for Long Term Care Insurance offered by a few carriers within the past couple of years is the Consumer Price Index, or CPI inflation protection. This inflation protection engine will increase your Long Term Care Insurance benefits at the actual CPI Index, computed by the US Government. Over the past 30 years it has averaged around 2.9%. The biggest risk to the consumer is that medical costs may rise more quickly than inflation as a whole leaving you with little actual protection.
Inflation Protection is the most important feature of your policy, especially if you are 70 or younger, or if you have longevity in your family.
Inflation and Long Term Care
Several years back, the California Department of Insurance commissioned a study of Long Term Care costs. Over a 30-year period, the inflation rate for LTC services specifically was 5.1%. This fact surprises many an agent, especially those currently recommending 3% inflation protection or CPI growth options to their clients.
A client of ours was comparing plans and had quotes from an agent with 3% Compound inflation protection. Were the client in his 70s we may have given this a pass. But the client was 58, and his wife is 59. This means that they are likely 25-30 years away from needing to use their LTC policy. Assuming an average cost today of $150/day, and using California’s 5.1% average price increase, they’d need $520/day in just 25 years.
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