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What To Look For When Purchasing A Long Term Care Insurance Policy

Inflation Adjustments

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To avoid being worth less by the time you need it, it's important to purchase a policy in which the benefit has built-in increases each year to keep pace with inflation. Nursing home costs usually increase at a faster pace than overall consumer prices.

Preferably, an inflation provision should cover increases on a compounded basis which is the way inflation happens - not on a "simple" basis.

With simple interest, the benefit only grows by a flat amount annually. For instance, with 5% simple interest, the benefit grows by a flat 5% annually. As an example: a daily benefit of $100 grows to $105 after one year, to $110 after two years, $150 in ten years and $200 in 20 years.

On the other hand, with compound interest, the benefit grows more in accordance with the way inflation works. With 5% automatic compounding, if you purchase a $100 benefit: after one year the benefit is $105. However, in 10 years the benefit is $162.89. In 20 years it is $265.

A policy with compound inflation protection costs about twice as much as one without it. It is cheaper if a policy is geared to the actual rate of inflation with a cap instead of an automatic number such as 5% per year.

If the premium is too high with a compounded inflation benefit, consider the following options:

  • Look for a policy with a capped benefit. In this situation, the benefit continues to grow with inflation to a maximum provided in the policy.
  • Another option is a provision known as "separate inflators." This involves a separate inflation provision for the daily/weekly benefit and one for the maximum benefit. Note that if the inflation provision with respect to the benefit is higher than the maximum benefit, you will receive the money you need on a daily basis, but run out of it faster than otherwise.
  • Look at a "guaranteed-purchase option" which does not include an inflation adjustment at first, but does allow you to adjust for inflation every few years by purchasing additional coverage. Premiums could eventually be much larger than if purchase a set premium with inflation built in.
  • Consider trimming other benefits in a Long Term Care insurance policy before eliminating automatic compounding.

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