Why Inflation Protection is Essential with LTC Insurance

One of the biggest concerns most people have is the rising costs of health care. The ever-growing cost of long-term care services is a significant part of this concern. A well-used strategy to assist you in transferring the risk of your future long-term care needs is buying an affordable Long-Term Care Insurance policy.

Long-Term Care Insurance has many moving parts to allow insurance consultants to build the best-individualized plan for their clients. The three areas that dictate the benefits available at the time a client has a claim are the monthly benefit amount, the lifetime benefits of the policy, and the inflation protection. All three components are necessary to build a balanced long-term care strategy; however, likely the most confusing to clients and most important to the expert assisting them is the inflation protection.

Why Do You Need Inflation Benefits with LTC Insurance?

Long-Term Care Insurance inflation protection is essential because the costs of long-term care services increase over time and your policy needs to do its best to keep pace with these increasing expenses.  

Typically, when you purchase an LTC Insurance policy, you are buying it to use in a future claim circumstance. The time you may actually utilize the policy's benefits could be ten, twenty, or more years from the date of purchase. Inflation protection grows policy benefits as the policy ages, so more substantial amounts of benefit are available at the time of claim, possibly keeping pace with the increasing costs of those services.

The expenses associated with long-term care services are increasing between 3 – 5% per year on average.  

Cost of Long-Term Care Services are Expensive and Increase Over Time

Additionally, the national average nursing home care expenses are just below $100K per year and most recipients of long-term care services need assistance between three and four years. You can see the current and future cost of long-term care services and supports by using the LTC NEWS Cost of Care Calculator.

If you are age 60 today you may likely pay $300 – 400K per year by the time you start using your benefits, depending on where you live and the type of care you receive. Imagine your costs if you are now in your 40s or 50s. To ensure the policy's benefits are adequate to cover these expenses when you need them, inflation protection needs to be included in your LTC policy.

Inflation Options with LTC Insurance

There are several different types of inflation protection or benefit increase options available with Long-Term Care Insurance policies. Most insurance companies provide more than one option allowing you to choose the best fit for your circumstances.

Simple Inflation Protection

The most basic inflation protection found on policies is simple inflation protection. This inflation option adds the inflation interest to the base benefit on an annual basis. Most companies provide a 3% or 5% simple inflation option. This is typically the least expensive option for adding inflation protection and it comes with some drawbacks. Simple inflation protection has slower growth of the benefit amount and may not keep pace with long-term care services' growing costs. 

Compound Inflation Protection

A long-term care insurance policy with compound inflation provides interest on interest compounding. 

Initial inflation protection is on the base, but every following year, the interest is added and compounded along with the base benefit. Compound inflation provides faster growth on the policy benefits that helps you keep pace with the increasing costs of services.  

Insurance companies usually offer 3% or 5% compounding. Some individual policies will give the client the option to choose anywhere from 1-5% compounding with options moving in increments of .25 basis points.  

You can tailor your policy specifically to meet your long-term care planning needs. In addition to this feature, some companies will allow a policyholder to increase their inflation coverage over the policy's age, allowing them to adjust the inflation protection up to ensure the policy keeps pace with growing costs. 

Compound inflation protection is a popular option because it helps the policy benefits grow faster. Moreover, for insurance policies that offer the partnership program, compound inflation protection is required.  

Indexed Linked Inflation

Hybrid or linked benefit LTC policies are becoming a popular option for many people. 

Hybrid LTC policies typically have some form of inflation protection option. Most of them offer simple or compound inflation on the base of the policy and the long-term care rider. However, on indexed long-term care annuities and life insurance, companies may offer an index-linked inflation protection. This inflation protection is tied to the chosen index, most popularly the S&P 500. 

Indexed linked inflation benefits can be problematic for the underlying benefits because there are no guarantees for growth on the policies, and with the linked benefit universal life policy, the policy itself is not guaranteed. Additionally, the policies have more complexities because they have participation limits, crediting limits, and the insurance companies reserve the right to make changes to these.

Guaranteed Purchase Option

A guarantee purchase option is found on policies that do not have inflation protection. Known in the industry as a GPO, this option allows the policyholder to purchase more coverage later. This option does not provide any pricing guarantee. The costs to purchase more coverage will depend on your attained age at the time of purchase and any increases that have taken place on policy benefits.

Purchasing an affordable Long-Term Care Insurance as a hedge against your retirement assets' depletion can be a valuable strategy. Having inflation protection on your LTC policy is arguably its most important component. Inflation protection establishes how the policy benefits will grow over time. It is imperative for you to understand the inflation protection options on your policy.  

Inflation protection is sometimes eliminated as an option on employee group plans or organization sponsored plans. If you are a participant in one of these, review your options and be certain of your strategy if inflation protection is not available.  

Compound inflation is typically the most lucrative option when it comes to growing policy benefits but having any inflation protection in place is better than none at all. Review your options and consider speaking with a Long-Term Care Insurance specialist that can detail and explain your options and help you make the best choice to meet your specific needs.