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

Inflation Protection

Automatic Inflation protection increase is the most important option to have in a long term care insurance policy. Inflation protection 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.

Two Inflation Protection Options for Long Term Care Insurance:

 5% Simple Vs. 5% Compound

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 of usually 10 or 20 years.
With “simple” inflation adjustment, the benefit increases by the same dollar amount each year. A $100 daily benefit increasing 5% per year will go up $5/day per year and be $200 a day in 20 years.

With “compound” inflation adjustment, the benefit increases by a higher dollar amount each year. A $100 daily benefit will be $265 a day in 20 years. Compound automatic inflation increase 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 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.

CPI or future purchase option is an inflation protection that is  usually offered to you by the long term care insurance company every three years with an existing policy. If your turn down the option to increase your benefit, you may not be offered the option again.  If you accept it they amount of coverage increase will be on your current age (not policy purchase date).