Inflation Protection...what happens to your benefits when Long Term Care costs rise?

Inflation Protection

Inflation protection is the most important option to have in a Long Term Care Insurance policy. This benefit increases the daily or monthly benefit amount over time to keep pace with inflation and increased cost of expenses.  Even though your benefits are increasing each year, your premium does not automatically increase.  Common choices include the following, in order of popularity:

• 5% Compound Inflation Protection 
• 5% Simple or Equal Inflation Protection 
• Future Purchase Option
• Consumer Price Index (CPI)
• 3% Compound
• 4% Compound

The Main Inflation Protection Options for Long Term Care Insurance

Long Term Care Insurance policies using automatic increase of benefits for inflation use either simple or compound rates.  The daily or monthly benefit increases, using a fixed percentage for either the life of the policy or for a fixed period (usually 10 or 20 years). Virtually every policy offered through LTC Tree includes all inflation protection options.

Simple (Equal) Inflation Protection:

With simple (equal) inflation protection, the benefit increases by the same dollar amount each year.  A $100 daily benefit increasing 5% per year will increase by $5/day per year and become a $200 daily benefit in 20 years.  Here's the math: $100 base + ($5 x 20 years) = $200.

5% Compound Inflation Protection:

With 5% compound inflation protection, the benefits 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:

Future purchase option is an inflation protection usually offered by the Long Term Care Insurance company every three years with an existing policy. If you turn down the option to increase your benefit, you may not be offered the option again.  If you accept the option, the amount of coverage increase will be based on your current age (not policy purchase date).

3% and 4% Compound Inflation Protection:

Two other types of inflation protection options, 3% and 4% inflation protection, are offered by a few companies in some states.  Be careful in selecting these lower rates, however, because they are a bit less on premium, but 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 late 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 4.2%. The biggest risk to the consumer is that medical costs may rise more quickly than inflation as a whole.

We believe strongly that Inflation Protection is the most important feature of your policy, especially if you are 65 or younger, as you hopefully won't use the policy for years to come (if at all!).