WHICH INFLATION PROTECTION SHOULD BE ADDED TO THE POLICY SO THE PLAN KEEPS UP WITH THE RISING COSTS OF LONG-TERM CARE SERVICES?

A number of options are available to help your long-term care plan keep up with the rising cost of care.

Future Purchase Offer–

This product is designed to protect the insured for 15 to 20 years, and inflation protection isn’t built into this plan.  Every three years, however, the insured is given the opportunity to increase the policy’s benefits regardless of changes in health. The increase in policy benefits would also have a corresponding increase in premium. My concern is that the initially low premiums would increase so dramatically that the insured would rather settle for a much lower benefit than pay the ever-increasing premiums. At the time long-term healthcare services are needed,   the benefit is inadequate to meet the needs of the insured. Let it be said, however, that some benefit is certainly better than none.

5% Simple Inflation Protection

By adding this rider, the original benefit amount will increase by 5% each year, and in 20 years the original benefit will have doubled.  In many cases, this is the option I recommend, particularly for those 70 years old and older.  I also use simple inflation for people in their 50s and 60s if they have considerable assets that can contribute to a long term care need. The simple inflation option costs less than the compound inflation option; however you’ll gain more coverage each year with compound inflation protection.  Carefully consider the simple inflation option so you will have adequate benefits when care is needed.

5% Compound Inflation Protection-

The original benefit will increase by 5% of the previous years’ benefit and in effect will double in approximately fifteen years.  The power of compounding is almost magical and will far outpace simple inflation in approximately 30 years.  Again, a careful analysis of one’s circumstances is necessary to determine which inflation option to add to the plan.  Sometimes the choice is easy.  For example, compound inflation makes sense for people in their 30’s and 40’s. I advise clients to start with a lower benefit amount knowing that the benefit will inflate to appropriate amounts during retirement years.  The compound inflation rider costs more than the simple inflation rider for obvious reasons. The financial obligation of the insurance carrier is much greater in the latter years of the contract, and with people living longer the projected pay out amount is much greater.  With the current state of the economy, I expect that many carriers will reconsider the option of compound inflation because they are going to have difficulty investing the premiums collected and get a return that allows them to pay the claims and make a profit.  Some carriers are already redesigning their long-term care insurance plans and pricing the compound inflation rider considerably higher than their previous plans.

No inflation

If you are 65 years of age or older, consider a long-term care insurance plan  consider a long term care insurance plan that is one and a half to two times the current cost of care without any added  inflation rider.  You can determine which plan is the best option by making a comparison between a plan that has a higher benefit amount without inflation and a plan that has a lower benefit option with simple inflation. Consider your current health as well as your family health history in making a decision. Many 75 year olds will live into their nineties, and a good plan design will take longevity into account.

 “No one looks forward to a time when he or she is dependent on others for personal physical care.  Long-term care insurance ensures a sense of dignity, control and self-reliance during a time in one’s life that can otherwise feel very out of control.  Having a ready source of funds to pay for the related costs make all the difference. LTC insurance does not eliminate the fear, pain, heartache, or anxiety associated with physical or mental decline, but it does provide peace of mind that cannot be measured monetarily.”Jan L. Brakefield, M.S., CFP, Assistant Professor, Department of Consumer Sciences, The University of Alabama