The message for you in this article is highly important for you to grasp. It is all about protecting the daily or monthly benefit you choose at the time of application from the HUGE impact of future inflation.
Choosing the correct inflation protection rider is absolutely critical for anyone under the age of 75 when they buy LTC coverage. Those over 75 should seriously explore their inflation protection options too!
Why? Because if care costs $150 per day today where you live, at just 5% inflation, 20 years from now it will be about $400 per day. That is $12,000 per month or $144,000 per year -- and the costs will keep growing.
And everyone knows that lifespans in north America continue to rise and the population of those aged over 90 is one of the fastest growing segments!
If you are 55 now, it may be 30-40 years before you would go on claim! Just 30 years from now, that $150 current cost per day will grow to $600 per day ($219,000 each year). In 45 years the costs will be nearly
$450,000 each year -- for EACH person!!
What if BOTH you and your spouse go on claim?
Now, all of the above figures are based on 5% inflation. There are two types of costs that over time, have risen faster than most others. Those costs are college costs and medical expenses! And 5% is a pretty
reasonable bet over the next few decades. But what if medical cost rise even faster?
Now back to inflation protection and LTC policies.
There are a few different options that one has -- to make the daily or monthly benefit chosen today, provide real and meaningful protection when you are LIKELY to go on claim.
The first type of inflation protection is the OPTION to buy more daily benefits at given intervals (usually every year or every other year) -- WITHOUT medical questions or examinations. This is the least beneficial
for you because you will spend so much more money over the long run.
Unfortunately, without the help of an experienced LTC specialist (such as enrolling in a group LTC policy at work) this is a huge mistake that MANY people make because in the short run, it seems less expensive.
Simply put, as you get older, you can't afford to buy the bigger increases needed to pay for the future costs of care since the increases get bigger... every year you get older!
So what is cheap in the very short run, quickly becomes the worst and most expensive option! Then you stop buying bigger benefits and you will lose ground to inflation. Worse yet, many years from now the policy will NOT
do the job you bought it for.
The next basic type of inflation protection is called SIMPLE (or Equal) inflation. This raises your daily or monthly benefit by 5% of the ORIGINAL benefit amount each year.
For easy math, if you had a $100 daily benefit to start with, the next year your benefit would go to $105 per day. The next year to $110. In 20 years your benefit would double to $200 per day. Every year the increase would be JUST $5 more (or 5% of the original benefit) than the year before.
The best type (for most people under age 72) of inflation protection to get is called COMPOUND Inflation. This is based on 5% as well -- BUT it is growing by 5% of the LAST year's amount.
It works just like a bank account, the more that is in there, the FASTER it grows. Instead of the figure of $200 above, having compound inflation would grow to $265 per day in just 20 years. That is a $65 per day or nearly $2,000 per month difference in your favor.
And more importantly, every year beyond that it grows faster and faster. This is the best way for most people to have a meaningful benefit when they go on claim twenty years or more in the future. For those likely to go on claim 30 - 50 years from now (you are in your thirties or older now), this is the ONLY
inflation protection to consider.
Now some companies have slightly different spins on these basic inflation protections. For example, a few insurers have a Compound option as described above, but offer a cheaper alternative as well. On the cheaper option the compounding STOPS growing WHEN the benefit doubles.
I have never recommended this option. There are better ways to structure a policy which will cost less in premiums and actually pay MORE when you go on claim.
Please note that the cost of having inflation protection is BUILT in to your premium. So just because your benefits go up every year to protect against inflation, it does NOT cause your premium to go up every year.
When one selects Compound inflation, there is a pretty cool thing that happens.
NO MATTER how young one is and no matter how many years of premiums they pay to the insurance company, with compound inflation they will get back ALL of the premiums (in terms of benefits) in less than a year of claim. That is true if they go on claim in 10 years... or 60 years.
**** Mark Jeffrey Shopping Tip. It is pretty rare that my clients do not see the
importance of Compound inflation protection and choose this option. If budget is an issue (as it is for most people) I would stick with a short and fat policy WITH compound inflation. For more FREE consumer LTC shopping tips you can go to
http://www.theLTCguy.com
About the Author:
Since 1997, Mark J. Orr, a Certified Financial Planner, has helped hundreds plan for more financial success through powerful strategies and advice.
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Long Term Care Insurance: Inflation Protection is a Critical Factor
