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How Can Long Term Care Insurance Keep Up With Inflation?

Mar 20, 2008
How can long term care insurance Keep Up With Inflation? When purchasing a long term care insurance policy, it is important to have an inflation protection rider included in your policy.

Since many people who purchase policies do not access their benefits for many years, having inflation protection helps keep your policy competitive with the rising cost of care. A 5 percent compound inflation protection rider is recommended for individuals purchasing long term care insurance who are under age 65. A more modest inflation protection option of 5 percent simple interest is recommended for people over age 65. With compound inflation doubling in 14.3 years, a 50 year old who purchases a $150 daily benefit with 5 percent compound inflation protection will have a $300 daily benefit by the time they are 65. The daily benefit will have grown by 5 percent compound each year. With simple inflation doubling in about 20 years, a 65 year old that purchases a policy with a $150 daily benefit and 5 percent simple inflation protection will have a policy that will have grown to $300 by the time they are 85 years of age. The daily benefit will have grown by 5 percent simple each year.

These types of inflation protection are automatic. The daily benefit will automatically increase by 5 percent compound or simple each year and premiums will stay level. We know what the cost of care is today but in 20 or 30 years when an individual is more likely to go on claim, having a policy without inflation protection will not provide enough coverage when it comes to claim time. Although having the inflation protection rider in your policy has been proven to keep your policy competitive, this finding is also due to the shift in care received in nursing homes toward assisted living and home and community based alternatives.

Recent studies have shown that more than 80 percent of the costs of care will be covered by such policies. Other options include a Guaranteed Purchase Option (GPO), or the option to increase coverage. This option differs greatly from an automatic inflation protection rider. Having a GPO is not automatic and your premiums are not level. With a GPO you can choose to increase your benefits periodically for example, every two or three years. A GPO usually gives you the option to increase your benefit by 5%, 10% or 15% of the original amount of your daily benefit. When you do increase your benefit, your premium will increase. The increase in premium is dependent upon the age you are at that time. If you increase your daily benefit regularly then you usually do not have to show evidence of insurability. If you do not regularly increase your benefit, you may not be given the chance again.

Inflation protection can be one of the most important decisions that you can make when purchasing a long-term care insurance policy. With the rising cost of care it is important that your benefits have raised throughout time or you may find years from now your policy is not adequate enough to pay for your care.
About the Author
Before you go out and buy a policy go to Long Term Care Insurance Guide and read Simplifying Long-Term Care
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