What is Inflation protection for long term care insurance?

It is widely considered a severe mistake to purchase a policy to provide long-term care that does not provide for inflation protection. Most people are fools and end up with policies that provide benefits which are meaningless and in the process have squandered years of premiums that have done nothing but enhanced insurance company profits. However, unless your policy provides a way for your daily benefit to increase, you will learn a very serious and sad lesson about the increasing costs of nursing home services. Assume nursing home costs today of $100 a day and 8% inflation, what will the cost per day be in 18 to 20 years? Apply the Rule of 72, the cost will double every 9 years and in 18 years a charge of $100 per day will be $400 [double in nine and then re-double in an additional nine years]. If you bought a policy that did not provide for an annual inflator your insurance carrier would only pay a fraction of your expenses. Inflation protection is critically valuable and important.

Insurance companies provide inflation protection through two vehicles. Some offer customers the right to buy additional coverage in the future at the future price the company will be charging. The catch here is that the new premium will be based on your current age, which means it will be more expensive because it is more probable that you will need nursing care, but many companies will sell you the coverage without proof of insurability. If you have a policy with this protection and if you are suffering from a progressive condition you would be smart to exercise your option to buy more coverage. The major disability for the consumer is that the price of buying added coverage goes up rapidly, and many customers decline the additional protection because they cannot afford it. Furthermore, some companies require that you buy the additional coverage when it's offered or you lose the right to buy more in the future.

The second approach to inflation protection is to provide for automatic benefit increases. But even here while the daily benefit increases by a fixed percentage, carriers usually cap coverage at the end of 10 or 20 years. Some companies may offer unlimited increases and others end benefits when a customer reaches age 80 or 85. The next trick employed by the carriers is the method used to calculate the percentage increase. Some use a "simple interest" approach and add to the daily benefit each year by a stated percentage of the original coverage. In a 5% simple inflator policy the coverage on a $100 daily benefit would increase by five dollars every year. At the end of fourteen years the daily benefit would be $170 dollars, but if the company used the "compound interest" method, at the end of 14 years the daily benefit would be close to $200 [72 divided by 5]. Always buy a policy with automatic increases that are calculated using the compounded method.

Over time, the bottom line is that the cost of services will increase. Long Term Care services are no different. For example, a nursing home that charges $130/day today will charge $260/day in 14 years assuming a 5% growth rate. Inflation options need to be selected at time of issue, and remember to not under-estimate the power of compound interest.