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Selecting an inflation rider for long-term care insurance

It's not just the chairman of the Federal Reserve Board who needs to worry about inflation. If you're buying a long-term care (LTC) insurance policy, think about purchasing an inflation rider. It's possibly the most important rider to consider when shopping for an LTC insurance policy. That's because your policy benefits aren't going to be worth as much in the future as it is today. A nursing home that costs around $70,000 per year in 2008 could cost more than $100,000 in the near future.

With an inflation rider, your daily benefit increases by a fixed percentage each year for a specified period. The lifetime maximum also increases proportionately.

"It's important that consumers at least have a discussion [with their LTC agent] about inflation. If the premium seems too high, consider reducing the daily or monthly benefit or the policy maximum but retaining inflation protection," says Beth Ludden, senior vice president for product development at Genworth Financial.

Without protection against inflation, an LTC policy could prove to be inadequate for your needs. But inflation riders also add significantly to the cost of long-term care insurance. It could double your premium. On the other hand, inflation riders can protect you from being underinsured later.

A simple or compound choice

When you buy inflation protection in a long-term care insurance policy, you can choose between a "simple" or "compound" rider. The adjustment with a simple inflation rider is a fixed percentage of your original daily LTC benefit. The compound inflation rider increases coverage more rapidly than the simple version.



If you buy an LTC inflation rider, make sure that annual increases are automatic and not contingent upon evidence of your insurability.

"Under a tax-qualified LTC insurancepolicy, at the time of application, a 5 percent automatic compound inflation feature must be offered to the consumer," says Jodi Anatole, Vice President, Long Term Care Product Management for MetLife. "Over the past several years, a number of compound inflation features have been introduced into the marketplace, such as a 3 percent automatic compound feature. The 5 percent automatic compound inflation feature is generally the most costly of the inflation features available today."

For example, if you choose a simple inflation rider of 5 percent with a $100 per day benefit, coverage will increase to $105 per day at the policy's first anniversary date. Your daily benefit will increase by $5 each year for the life of the policy.

With a compound inflation rider, you'll gain more coverage each year. Instead of rising 5 percent based on the original daily benefit of $100, it will be based on the higher amount of coverage at each anniversary date of the policy. (After the benefit goes to $105 after the first year, the next increase will be 5 percent of $105, and so on.) In 2008, the average LTC insurance consumer purchased a $150 per day benefit — give or take a few dollars depending on place of residence, Ludden says.

A good time to seriously consider purchasing an LTC policy with an inflation rider is when you reach your 50s. Choosing between a simple and compound inflation rider depends on a number of variables, including your age and health.

Ludden adds that if you're over age 60, a simple inflation rider could be adequate. But she warns that waiting until your 60s to purchase a policy could make you uninsurable – depending on your health. If you're younger, a compound rider could be the wiser choice. Also, purchasing either inflation rider at a younger age means you will pay less (accumulatively) in premiums, she adds.

A simple rider is roughly 24 percent cheaper than a compound (or 76 percent more on your premium), adds Ludden.

Another strategy

There's also a third option. Jesse Slome, executive director for the American Association for Long-term Care Insurance, a non-profit organization, says purchasing a guaranteed-purchase rider is another way to keep up with inflation. This is sometimes also called a "future purchase option rider." Even if your health deteriorates, this rider gives you the option to purchase additional coverage in the future. Note that any additional coverage will be priced for your higher age.

"It may be better to simply buy a higher daily benefit," Slome says. "Instead of the daily benefit increasing with an inflation rider, you always have the option to increase your coverage."

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