How Does Long Term Care Insurance Inflation Protection Work?

Q: Some of the long term care insurance policies I am researching allow for inflation protection. Can you explain long term care insurance inflation protection and what advantages it may provide?

The Problem – The Rising Cost of Long Term Care

At approximately $220 per day, the average cost for a one year stay in a private nursing home room in 2012 is approximately $80,000. With the average long term care need lasting approximately three years, you could spend over $252,000 if you needed to receive long term care today.

The main issue, however, is that for most purchasers of long term care insurance the need to make a claim is most likely 15, 20, 30 years away.  Or longer.

Long term care costs have typically increased an average of 5% on an annual basis.. 

If  long term care and health care costs increase, as projected, a 55 year old today will expect to pay approximately $930/day or $340,000/year for long term care in 25 years at age 80.

A 3 year need will cost $1.1 million per person — easily wiping out a lifetime of savings for many families.

The Solution – Long Term Care  Insurance Inflation Protection

A long term care insurance policy with inflation protection, sometimes called a benefit increase rider, increases your benefits each year. A long term care insurance policy without inflation decreases in value, on an inflation adjusted basis, every year the cost of long term care increases.

Differentiating between the various forms of inflation protection is critical in determining which type of inflation protection is best for your needs.

Automatic Inflation Protection in Long Term Care Insurance Policies

5% Simple Inflation Protection

With simple inflation protection, your policy benefits increase at a fixed percentage of your original daily benefit. As evidenced by the chart above, a 5% simple inflation protection policy will increase a $220 per day or $80,000 per year benefit to $495 per day or $180,000 per year, over the course of 25 years. This should cover about 53% of your daily or annual nursing home costs. Simple inflation is appropriate for individuals in their later 60's or 70's.

5% Compound Inflation Protection

With compound inflation protection, your policy benefits increase at a significantly faster pace, as each year’s benefit increase compounds upon the previous year’s increase. As evidenced by the chart above, a 5% compound inflation protection policy will increase a $220 per day or $80,000 per year benefit to approximately $930 per day or $340,000 per year, over the course of 25 years. This should cover your future nursing home costs. 5% Compound inflation is critical for individuals in their 40's, 50's and 60's where it can reasonably projected that a claim is at least 20-30 years away.

4% Compound Inflation Protection, 3% Compound Inflation

Recently introduced options by a few providers, these options will meet Long Term Care Insurance State Partnership Program guidelines while affording the consumer less benefit growth in exchange for lower premiums.

CPI Compound Inflation Protection

Very few companies will offer inflation increases tied to the CPI index.  With this option, your benefits will increase according to the annual increase of the Consumer Price Index.  Please keep in mind that CPI has averaged about 2.4% 1983-2012.  Long term care costs, and health care costs are not necessarily tied to the CPI index. A purchaser of long term care insurance will likely be better off electing a fixed compounded percentage, 5% compound if at all possible.  Even a 4% compound or a 3% compound option will probably yield higher benefit increases than a CPI based model.

No Inflation Protection or Simply a "Future Purchase Option" or a "Guaranteed Purchase Option"

Many long term care insurance policies do not contain any inflation protection, or simply gives the policyowner an "option" to buy more. 

Please do not confuse "Purchase Options" with automatic inflation protection.

We often see this within policies offered to employees in group settings.  For younger applicants, of which most employees in group settings are, the lack of automatic inflation is a big problem.

Where a Purchase Option might make sense is with older applicants in their middle seventies or later when it is reasonably determined that there is less time between point of application and the need to make a claim.  Or even with applicants that have sufficient assets to co-insure part of the long term care cost.

For individuals in their middle seventies or older, the cost to add inflation protection can become expensive. You may consider forgoing inflation protection and simply obtaining a policy with a daily benefit greater than the current cost of care in the marketplace should you wish to account for future costs of long term care.

Here is a chart comparing long term care inflation protection.  You can see why the 5% compound inflation factor is important if you are buying long term care insurance in your 40,'s 50's, or 60's.

Long Term Care Insurance Inflation Protection

Age	5% Compound	5% Simple	Purchase Option
55	$6000	$6000	$6000
60	$7657	$7500	$6000
65	$9773	$9000	$6000
70	$12,473	$10,500	$6000
75	$15,919	$12,000	$6000
80	$20,317	$13,500	$6000
85	$25,931	$15,000	$6000
90	$33,095	$16,500	$6000

Action Step – Protect Yourself with Long Term Care Insurance Inflation Protection

When you purchase a long term care insurance policy with inflation protection you protect yourself from the rising cost of long term care. Be sure your policy benefits increase as the cost of long term care increases or be prepared to spend significantly more out of your own pocket.

One cautionary note:  Many group long term care insurance policies do not offer automatic inflation protection as an option.  For this reason, a group long term care insurance policy might be problematic and are "ticking time bombs", so to speak.

Additionally,  most employees enrolling in group long term care insurance plans are in their 40's, 50's or 60's.  Thus, the lack of availablility of a 5% compound inflation rider within the group long term care insurance policy is a significant issue considering the enrollees need this benefit more often than not.

Get Good Advice on Your Inflation Protection Choices

More than any other benefit, we have seen the vast majority of long term care insurance mistakes revolve around the inflation protection benefit.  We see the same repeated mistakes when we conduct policy reviews.  Sometimes the agent is a property and casualty agent and we are not too surprised; other times the agent is a life insurance agent with an A++ life insurance company and the client is surprised that an agent with such a "reputable" company is not trained properly.

If you would like to learn more about the various long term care insurance inflation options and find out which policy option makes sense for you, please give us a call toll free at 1-800-891-5824 or simply complete our contact form and we will get back in touch with you.

We are here to answer your long term care insurance questions, guide you through your options and help you make good decisions.