Don't Let Inflation Destroy the Benefits of your Long Term Care Insurance
Long term care insurance can be an ideal way of taking care of someone who develops a degenerative medical disease. People are living longer, meaning that the need for this type of insurance is steadily increasing. The problem is, purchasing long term care insurance now doesn't guarantee you'll be taken care of in the future, due to one small snag that many people unfortunately overlook.
That small snag is the effect that inflation has on your long term insurance. And, unfortunately, inflation can destroy the protection you spend years paying for if you don't consider this issue when choosing your long term care cover.
- The Effect of Inflation
Let's say you purchase a policy that gives you an income of $2,500 per month at current rates. With an inflation rate of just four percent per year, your $2,500 would lose a staggering 44% of its purchasing power over fifteen years. At that point, your $2,500 would have a value of just $1,400.
This assumes that the costs of long term care increase at a rate in line with standard inflation, which may not necessarily be the case. Depending on how much insurance you buy, and when you buy it, and the age at which you must make a claim, your policy might end up covering as little as five or ten percent of your long term care costs. That all but renders your insurance useless, so it becomes necessary to choose a policy that will protect you from inflation.
- How can you Protect Yourself?
There are four options for inflation protection. Unfortunately, however, none of the available options provide full inflation protection. Regardless of the option you choose, your policy will lose some value over time-it's just a question of how much.
Buy more Coverage: An insurance agent might promote this to you as the best way of protecting yourself against inflation. In fact, it's the worst and most expensive, because all you're doing is buying more of a commodity that will decrease in value over time.
Indexed Inflation: This allows you to increase the amount your policy will pay every so often (usually three years). The amount you can increase the policy by is tied to the consumer price index, so it's based on the real inflation rate. This is a less-than-ideal option for two reasons: first, because opting to increase your policy value also increases your premium, and second, because the inflation adjustment isn't much help if the costs of long term care continue to increase at a much higher than average rate.
Simple Protection: Simple inflation protection increases the daily benefit you would receive in the event of a claim by a fixed percentage each year. This is only marginally useful, however, simply because the cost of long term care has increased at a faster rate than simple protection can account for. Even if you purchase simple protection, you'll still suffer from vastly reduced purchasing power over time.
Compounded Protection: This option increases the daily benefit by a certain percentage each year, compounded. This means each year, the daily benefit value increases by, say, five percent of the previous year's value (instead of five percent of the original value). Compounded inflation protection isn't perfect-your policy will still lose some value over time-but it's the best option available.