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.  Common choices include in order of popularity:

1. 5% Compound Inflation Protection 
2. 5% Simple or Equal Inflation Protection 
3. Future Purchase Option
4. CPI Index
5. 3% Compound
6. 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 in most cases. 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 or equal inflation protection, 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 a compounded inflation adjustment, the benefits increase 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.

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).

A few other types of inflation protection options with some companies is a 3% or 4% compound inflation protection.  Be careful if selecting these because they are a bit less on premium, but the difference between 5% compounding vs. 3% compounding will be significant in 25+ years.  Those types might be a good fit for people who buy long term care insurance in their late 60's.

One last type of inflation protection for long term care insurance that has come out with a few carriers is the past couple years is the Consumer Price Index or CPI inflation protection.  With this inflation protection engine it will grow your long term care insurance's benefits at the actual CPI Index which is computed by the US Government.  Over the past 50 or so years it has averaged around 3%, but the risk to the consumer is medical costs typically rise quicker so be sure to do your homework when selecting this feature.