Inflation protection can be one of the most important additions you can make to a long term care insurance policy. Inflation protection increases the premium. However, unless your benefits increase over time, years from now you may find that they haven’t kept up with the rising cost of long-term care. The cost of nursing home care has been rising at an annual rate of 5% for the past several years. This means that a nursing home that cost $150 a day in 2000 will cost $398 a day in 20 years, if inflation is 5% a year. Obviously, the younger you are when you buy a policy, the more important it is for you to think about adding inflation protection. You can usually buy inflation protection in one of two ways: automatically or by special offer.
Automatic Inflation Protection. The first way automatically increases your benefits each year. Generally, there would be no increase in premium when the benefit is automatically increased. Policies that increase benefits for inflation automatically may use simple or compound rates. Either way, the daily benefit increases each year by a fixed percentage, usually 5%, for the life of the policy or for a certain period, usually 10 or 20 years. The dollar amount of the increase depends on whether the inflation adjustment is “simple” or “compound.” If the inflation increase is simple, the benefit increases by the same dollar amount each year. If the increase is compounded, the dollar amount of the benefit increase goes up each year. For example, a $100 daily benefit that increases by a simple 5% a year will go up $5 a year and will be $200 a day in 20 years. If the increase is compounded, the annual increase will be higher each year and the $100 daily benefit will be $265 a day in 20 years.
Effect of Inflation on Daily Rates for Nursing Home Care
COMPOUND INTEREST
Rate of Inflation 2000 2005 2010 2015 2020
5% $150 $191 $244 $312 $398
6% $150 $201 $269 $359 $481
7% $150 $210 $295 $414 $580
8% $150 $220 $324 $476 $699
SIMPLE INTEREST
Rate of Inflation 2000 2005 2010 2015 2020
5% $150 $188 $225 $263 $300
6% $150 $195 $240 $285 $330
7% $150 $203 $255 $308 $360
8% $150 $210 $270 $330 $390
The chart is for demonstration purposes only. It shows simple inflation increases over a 20-year period. Automatic inflation increases that are compounded are a good idea, but not all policies offer them. Some states now require policies to offer compound inflation increases. Check with your state insurance department to find out if this applies in your state. All individual and some group tax qualified policies must offer compound inflation increases as an option. Compounding can make a big difference in the size of your benefit.
Special Offer or Non-Automatic Inflation Protection.
The second way to buy inflation protection lets you choose to increase your benefits periodically, such as every two or three years. With a periodic increase option, you usually don’t have to show proof of good health, if you regularly use the option. Your premium will increase if you increase your benefits. How much it increases depends on your age at the time and on the amount of additional benefit you want to buy. Buying more benefits every few years may help you afford the cost of the additional coverage. If you turn down the option to increase your benefit one year, you may not get the chance again. If you get the chance later, you may have to prove good health, or it may cost you more money. If you don’t accept the offer, you need to check your policy to see how it will affect future offers. Some policies continue the inflation offers while you are receiving benefits, but most do not. So check your policy carefully before you buy. The above charts and graphs illustrate the effects of inflation in two formats.
NOTE: Most states have adopted regulations that require companies to offer inflation protection. It’s up to you to decide whether to buy the coverage. If you decide not to take the protection, you may be asked to sign a statement saying you didn’t want it. Be sure you know what you’re signing.
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