Do I Need Long Term Care Insurance Inflation Protection?
How Long Term Care Insurance Benefits Grow Over Time
Inflation protection is typically offered as a rider on most long term care insurance policies, but it's arguably the most important feature in the design of your long term care insurance plan. Without inflation protection, the benefit you buy today won't mean much in twenty or thirty years. With inflation protection, your long term care insurance benefits grow over time to help keep up with the rising cost of long term care while your insurance premiums remain level. Today there are many long term care insurance inflation options to choose from.
- Compound Inflation Protection - 2.5% to 5% compound interest growth for the life of the policy
- Compound Inflation Protection 20 Years - 5% compound interest growth for only the first twenty years of the policy
- Simple Compound Inflation Protection - 5% simple interest growth for the life of the policy
- Future Purchase Option Inflation Protection - An option to buy inflation protection at a later date
- Consumer Price Index (CPI) Inflation Protection - An interest rate growth based on the CPI for the life of the policy
Simple Inflation Protection
With simple inflation protection, your long term care benefits increase by the same dollar amount each year. For example, a $100 daily benefit increasing 5% per year will increase by $5/day per year and become a $200 daily benefit in twenty years.
2.5% - 5% Compound Inflation Protection
With compound inflation protection, your long term care benefits increase each year by a compounded interest rate. For example, a $100 daily benefit with a 5% compound interest rate will grow to a $265 daily benefit in twenty years.
Some long term care insurance policies now offer a 20 year compound inflation option that grows the long term care benefit at a compound interest rate for only twenty years (and not for a lifetime). This is an excellent strategy for applicants age 65 or older to save money on long term care insurance.
Future Purchase Option Inflation Protection
A future purchase option provides you with the option to buy inflation protection in the future (typically offered every three years). with an existing policy. Once you decline the option to increase your benefit, some insurers will not offer you the option again. Since the cost for the offered inflation protection will be based on your current age and not the policy purchase date, this is an expensive way to buy inflation protection. Most advisers do not recommend this inflation protection option.
Consumer Price Index (CPI) Inflation Protection
Some long term care insurance companies also offer an inflation protection option based on the Consumer Price Index (CPI). This inflation protection option increases your long term care benefits at the rate of the CPI Index computed by the US Government. This rate changes every year and has averaged 4.2% over the last thirty years. Since the CPI index does not track the actual inflation rate for long term care, this is a risky way to buy inflation protection since your benefit may not grow enough to keep pace with the actual rise in the cost of care. Most advisers do not recommend this inflation protection option.
Which Inflation Protection Option Is Right For Your?
There are many factors in determining which long term care insurance inflation protection option is right for you including your age and premium affordability. It is stongly recommended that individuals ages 65 or younger buy compound inflation protection since they probably won't need to access their long term care benefits for at least twenty years. Individuals over the age of 65 may be better served by selecting a limited compound interest or a simple interest inflation protection option.
How Much Money Can You Save On Long Term Care Insurance?
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