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Selecting an inflation rider for long-term care insurance

 

Tip

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

It's not just the chairman of the Federal Reserve Board who needs to worry about inflation. Inflation can also eat into your long-term care (LTC) insurance policy.

That's because your policy benefits aren't going to be worth as much in the future as it is today. There is a way to fight inflation though. If you're buying a long-term care policy, think about purchasing an inflation rider. It's possibly the most important rider to consider when shopping for an long-term care insurance policy.

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, a long-term care insurance policy could prove to be inadequate for your needs. Every dollar is critical given that the average nursing home costs more than $90,000 per year and that will likely exceed $100,000 soon.

Inflation riders can protect you from being underinsured later, but they don't come cheap. Inflation riders can double your long-term care premium.

Inflation rider: 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 long-term care benefit. The compound inflation rider increases coverage more rapidly than the simple version.

"Under a tax-qualified LTC insurance policy, at the time of application, a 5 percent automatic compound inflation feature must be offered to the consumer," says Jodi Anatole, president at Endeavour Consulting LLC in Greenwich, Conn.

Most people who buy inflation protection opt for the more affordable 3 percent. The 5 percent automatic compound inflation feature offers the most protection, but it's generally the most costly of the inflation features available. You'll want to price each option to see what you can afford and what makes the most sense for your situation.

Here's how it works. Say 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. (Once the benefit goes to $105 after the first year, the next increase will be 5 percent of $105, and so on.)

When to buy a long-term car insurance policy with an inflation rider

A good time to seriously consider purchasing a long-term care insurance 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 (cumulatively) 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 long-term care insurance 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 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."

Smaller long-term care insurance market

If you decide to buy long-term insurance, you won't have as many options as a decade ago. Fewer than 100,000 people bought long-term care insurance in 2016, which is well below the 750,000 policies sold in 2002.

The number of people with long-term care insurance has remained steady over the past 10 years. People are instead opting for combined life insurance policies with long-term care benefits. More than double the number of people choose combination plans rather than traditional long-term care insurance.

The market's shrinking also led to fewer companies offering LTC insurance. Milliman Inc. reported that 17 carriers sold traditional long-term care policies in 2016 with Northwestern Mutual and Mutual of Omaha accounting for about half of the sales.

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