Recently, I wrote about selecting a daily benefit for your long term care insurance (LTCI) policy. Making sure that you start your policy with a daily benefit amount that matches the current cost of continuous care is vitally important. But there are a couple of additional steps you’ll need to take if you want to be sure that the buying power of your policy benefits do not erode over time. Take note that inflation constantly eats away at the true value of LTCI benefits. This means that a daily benefit that is adequate this year may be seriously insufficient when you actually need the care several years from now. That is the reason why LTCI policies typically offer some form of inflation protection to help making sure that your policy benefits will continue to keep pace with rising costs of the industry.
What are my options for inflation protection? Inflation protection options offered to policyholders can vary greatly from one carrier to another. But there are two options which are commonly used by the majority of insurance companies: a 5% compound option and a 5% simple inflation protection option. 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, 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.
Now how to decide which choice will work best for me? Generally speaking, the longer you wait to access the policy benefits, the more compound interest will benefit you. A lot of people seem to access their policy benefits after the age of eighty. For example, a person who is fifty years old could have thirty years or more before needing care. But on the other hand, a person who is 65 may not see as much benefit from compounded interest. One more factors that you may consider is the how fast the cost of care has increased in the state where you plan to retire. Some states in the South have historically had much lower costs of long term care than other parts of the country. Some of the other states, especially those in the Northeast, have had regular and significant increases in the cost of care. A great place to start is with Genworth Financial’s interactive map, which shows the state averages for costs of care across the United Sates. This figures include assisted living, home-health care, home care costs and nursing home. One cost-effective option is to raise the daily benefit along with simple inflation protection. This will give your benefits an initial head start and pushes the break-even point between simple and compound interest farther out on your timeline.
The Bottom Line: Weigh Your Options First. Since the idea of compounding costs more than a simple inflation protection, it’s a good idea to ask for quotes on both to see how each choice works on your premium. A good LTCI consultant will be happy to work with you as you select which 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.
