How can I address the rising cost of LTC in designing my LTC coverage?

Increases in the cost of long term care have historically exceeded the consumer price index. Accordingly, if an LTC benefit is to keep pace with the rising costs of care, it is important to include a strong inflation protection feature in the plan. The most common and generally most generous inflation protection option is automatic 5% compound inflation protection, with no limit on inflation increases. With this option, both the daily and lifetime maximum benefits increase by 5% of the prior year’s inflated benefit amount, while premiums do not increase due to benefit increases. Alternatively, many carriers also offer a 5% simple inflation protection option. This option increases benefits annually by 5% of the original benefit amount.

In addition to automatic inflation options, many carriers offer a “future purchase option” (FPO), under which insureds are offered the option to purchase additional benefits annually (or triennially), without providing evidence of insurability. However, with FPO coverage, whenever you accept an increase offer, your premiums increase based on your attained age when you purchase the increased coverage. Thus, a plan with FPO can look very inexpensive initially, but typically, by the time you reach your late 60s, the cumulative premiums for FPO will exceed premiums for automatic 5% compound inflation protection and the monthly premium may be as much as 10 times what the starting premium was.

Which inflation protection option to choose depends largely on your age when you purchase your coverage. The average age at time of claim is approximately 77, and the cost of care has been increasing faster than the consumer price index. Therefore, ideally one should plan to have benefit that is equal to the anticipated cost of care at age 77. With automatic 5% compound inflation protection, your initial benefit will double after approximately 15 years, whereas with simple inflation protection, it takes 20 years to double. Accordingly, we recommend compound inflation protection for applicants who are age 70 or younger and simple inflation protection for individuals above that age. We do not recommend the future purchase option other than in very limited circumstances.