INFLATION PROTECTION FOR LONG TERM CARE INSURANCE
What is Long Term Care Inflation Protection?
Long Term Care Insurance Inflation Protection is an essential option that increases your daily or month benefit amount each year to keep pace with inflation. This benefit is optional so you will have to request it.
It is projected that Long Term Care daily cost, which today is about $150 a day will increase in just 10 years to approximately $244 a day, and in 20 years will increase to approximately $397 a day. In 30 years it is projected that Long Term Care cost will increase to an astronomical $647 dollars a day.
With most policies your premium does not automatically increase yearly when you add the Long Term Care Insurance Inflation as an option, and the good news is your benefits will increase each year. Since this is an option or a “rider”, you will have to pay a little extra for it. Please note that rates can go up over time, but any increase must be to all similar policyholders and must be approved by your states Department of Insurance.
The following are the typical yearly Long Term Care Inflation Protection increases and options:
- 3% Simple or Equal Inflation Protection (Ages 75 or older)
- 5% Simple or Equal Inflation Protection (Ages 75 or older)
- 3% Compounded (Under age 75)
- 5% Compounded (Under age 75)
- Consumer Price Index (CPI)
- Future Purchase Option
- Step Rated Compound
3% Simple or Equal Inflation Protection: With 3% simple, your benefit will increase 3% each year, so it will take approximately 33 years for your daily benefit to double or increase 100%. For example, if you purchased a policy today for $100 a day benefit, then 33 years from now that policy will pay $200 a day. If you’re over 75 years old this may be a good option, but it also depends on your family’s longevity.
5% Simple or Equal Inflation Protection: Same as 3% Simple except the daily benefit will increase 5% yearly. If you purchase a policy today for $100, then 20 years from now the policy will double and will pay $200 a day. Again, if you’re over 75 years old this may be a good option, but also consider your family’s longevity.
3% Compounded: With 3% compounded yearly the amount is compounded or added to the principal each year and benefit increase more dramatically. With this option it will take approximately 24 years for the daily benefit to double. For example, the first year benefits will increase 3% but the next year it will increase the previous year’s total, which is 103% by another 3% (first year 100 a day x .03 percent = 103 dollar a day , and the second year 103 x .03 percent= 3.03 + 103 – 106.09 the second year). This type of inflation protection may be a good option for someone who buys LTC insurance in their 60’s.
5% Compounded: Same as 3% compounded except the daily benefit will increase at 5% compounded. With this option it will only take approximately 15 years for the daily benefit to double.
Consumer Price Index (CPI): A few insurance companies offer Consumer Price Index Inflation Protection. This option will increase your benefits at the actual CPI index, which is computed yearly by the US Government. Over the last 30 years is has averaged just under 3%, actually 2.9%. However the concern with this option should be, that medical cost could rise more quickly than inflation as a whole, and you would have little protection.
Future Purchase Option: This is an option sometimes called Guaranteed Purchase Option and are usually offered by Long Term Care Insurance Companies every three years with an existing policy. They are common with group long term care insurance plans and can be a financial disaster, especially if you are younger. The problem with this option is also that if you turn down the option (which means your premiums increase) to increase your benefit, you many not be offered the option again. Which means that your coverage will be reduced permanently for the rest of your life.
Step Rated Compound: With Step Rated Compound you receive a compounded interest rate yearly, however your premium also go up in a step rated fashion. We do not recommend the policies that have step rated compound interest. With this type of policy you benefit will grow and at the same time your premium will increase. They seem attractive at the beginning because of reduced premiums, but in future years the increased premiums can be very difficult to maintain.
If your below the age of 70 or you have longevity in your family, Inflation protection is an essential feature that you should consider.
For example, from 2003 to 2013, Genworth Long Term Care Insurance reported that nursing home cost has gone up over 4% per year. If you will not need your Long Term Care Insurance for 30 years a $170 a day nursing home room compounded at 4% for 30 years will cost $551. If you buy 3% compounded interest in 30 years it will only pay $412 dollar a day. This would mean that in 30 years you would still pay out of pocket $139.
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