Long term care insurance is a type of insurance policy that is not a bad idea to have should you be aging, or have a family history of family need for long term care. When it comes to long term care insurance you basically get a daily benefit amount that your insurance will pay out daily for the time you need long term care. The problem is that often times you get your plan years before you use it and because of inflation the daily benefit amount may no longer be enough. Thus comes into play inflation protection.
Right now, in most major metropolitan areas long-term care policies for seniors with high labor costs can expect to pay $167 per day for nursing home care. This is a staggering amount if you have to pay it out of pocket, this translates into $61,000 per year. If a consumer purchases a policy that pays a fixed $100 per day, with an inflation rate of six percent per year, $100 per day will pay less than one-third of the daily cost in 12 years, and 14% of the cost in 24 years, which means that you would still be paying out a staggering cost despite the fact that you have insurance. Think of it this way, the math is easy, and at six percent inflation the cost of nursing care will double every 12 years and the daily charge will become $354. In twenty-four years the same nursing charge will have grown to $708 daily. So if you were to purchase today at say age 56 a long-term care with a fixed benefit of $100 per day who requires nursing-home care at age 80 will have to pay more than 85% of the costs out of his or her own pocket. That does not sound too fun huh?
So what can you do? Well, the answer is to purchase compounded inflation protection that increases the benefit the policy will pay each year. Since health-care costs predictably will continue to inflate, getting inflation protection is the only smart way to have long term care insurance. Buying a policy without it is not worth much.
What are your options for inflation protection? You basically have four options:
1. Simple inflation protection. This option increases the daily benefit annually by a given percent of the original base benefit. In other words, a $100-per day nursing home benefit which covers 60% of today’s costs would increase $5 each year, making the daily benefit $150 after ten years and doubling the benefit after 20 years to $200. With today’s inflation this is still not going to be enough, but it is a start.
2. Five percent compounded inflation protection. Rather than increasing the daily benefit by five percent of the original benefit, this option increases the benefit by five percent compounded, meaning that each successive year’s benefits are increased by five percent over the previous year. So while the example above pays simple inflation protection and would pay $200 per day in costs after 20 years, the compounded option at 5% compounded per year will pay approximately $265 per day, after twenty years. This plan is probably the best option for keeping up with the inflation, but still is not perfect.
3. Indexed inflation option. This option gives the buyer the right to increase the amount their policy will pay once every three years. The amount of the increase is indexed and tied to the Consumer Price Index reported by the U.S. government. This option is based on the real rate of inflation. The problem with this is that as the benefit increases so does the premium. As the policy and the owner age the premium increases significantly and for purchasers on fixed incomes it is probable the policy will be discontinued because it is too expensive at a time when coverage is most needed, so this could be a winner if the price was not a factor.
4. Option to purchase additional coverage. This option offers little benefit to the consumer because it only allows the policyholder to purchase additional benefits at then-current rates, so it is not like you can buy more for the rate you originally purchase. The one benefit is that you can purchase additional coverage without having to prove medical eligibility. However, despite that advantage, Consumer Reports rated this the worst possible option. It is equivalent to no inflation protection.