How Does Inflation Protection Work?

Because it is not uncommon for an individual to purchase a Long-Term Care insurance policy 20 or 30 years before they expect to use their benefits, Long-Term Care insurance companies usually provide clients the option to purchase an additional feature that will enable benefits to increase periodically by a specified percentage while the policy is in force. The reason for this is simple — the costs of Long-Term Care services, like any other good or service, increase over time.

Inflation protection features typically use one of the following methods:

• Simple Benefit Increase
Benefits increase by a specified percentage on an annual basis. One, two, three, four, five or six percent increases are typical. The increase is always based on the original daily benefit.

• Compound Benefit Increase
Benefits increase by a preset percentage on an annual basis. A five percent compound increase is typical. The percentage increase in this case is always based on the current daily benefit. This allows for a much more rapid increase of the daily benefit amount.

• Future Increase (or Guaranteed Purchase) Option
This option allows the policyholder to purchase additional coverage in the future, with no medical questions. Once you are on claim, or have declined to use the option a number of times, it is no longer available. Some policies base the increase on a stated dollar amount, but most are tied to the overall Consumer Price Index (which does not keep pace with the medical component of the CPI). This can also be an expensive way to add coverage because the premium for the additional benefit is based on the policyholder's current age, not their age when they purchased the policy.

Inflation protection can be the difference between a Long-Term Care insurance policy that performs very well when and if care is needed, and a policy that falls short. The chart below illustrates the difference inflation protection can make on your daily benefit amount.

Under most Long-Term Care insurance policies, once you go on claim, inflation protection continues to increase your unused maximum lifetime benefit.

As you can see, it is important to consider adding inflation protection when purchasing a Long-Term Care insurance policy, especially if you don't expect to use your benefits for several years.