Preserving Your Long-Term Care Coverage With Inflation Protection

Author: Duane Lipham, CLTC

Making sure that you start your long-term care insurance (LTCI) policy with a daily benefit amount that matches the true current cost of care is a vitally important step. But more is required if you want to be sure that the buying power of your policy benefits do not erode over time.

Inflation constantly chips away at the true value of LTCI benefits. This means that a daily benefit that is very adequate this year may be seriously insufficient when you actually need the care several years from now. That is why LTCI policies typically offer some form of inflation protection to help insure that your policy benefits will continue to keep pace with rising costs in this industry.

Inflation protection choices offered to policyholders can vary greatly from one carrier to another. But there are two options that are almost universally used by the majority of insurance companies. That is either 5% compound or 5% simple inflation protection.

So how do you decide which choice will work best for you?

Compounding interest will have a dramatically greater effect on the amount of total benefits available to you over a long period of time. Most investors know that to see the true effects of compounded interest though, you need to be patient as it can take several years to become readily apparent. This is also true of inflation protection in LTCI policies.

Generally speaking, the longer your expected time horizon for accessing the policy benefits, the more compound interest will benefit you. Many people seem to access their policy benefits after the age of eighty. So a person who is fifty years old could have 30 or more years before needing care. On the other hand, a person who is 65 years old may not see as much benefit from compounded interest.

Another consideration is the how fast the cost of care has increased in the state where you plan to retire. Some states in the southern part of the United States have historically had much lower costs of long-term care than other parts of the country. Other states, particularly those in the Northeast, have had regular and significant increases in the cost of care.

Another cost effective option is to raise the daily benefit along with simple inflation protection. This gives your benefits a head start initially and pushes the break-even point between simple and compound interest farther out on your time horizon.

Since compounding costs more than simple inflation protection, it may be a good idea to ask for quotes on both to see how each choice affects your premium. A good LTCI consultant will be happy to work with you as you choose the inflation protection that will work best for you. There are no hard and fast rules in this area of policy design, but a healthy dollop of common sense and reason will usually help you make the right decision for your unique situation.