Daily benefit amounts. Elimination periods. Covered services. These are important considerations when purchasing long-term care insurance. But what about inflation protection? It just may be one of the most important features of an LTCI policy.
As agents, we talk to clients about the high cost of long-term care services today. But that’s not enough. We also need to discuss what that care will cost in the future. According to the American Council of Life Insurers, the cost of long-term care services is expected to quadruple in 30 years. Adding an inflation-protection rider to an LTCI policy can help ensure the benefit amount a client selects today will increase, along with the cost of long-term care services.
With LTCI now on the radar screen of many Baby Boomers, the need for inflation protection is even greater. For example, if a 50-year-old is shopping for an LTCI policy today, a $150 daily benefit probably is adequate to cover the average cost in a nursing home, which currently is $55,000 per year according to ACLI. But when you factor in the expected increase in the cost of long-term care services, that person potentially could face an annual nursing home bill of $220,000 by age 80.
This is such an important issue that states have adopted regulations requiring insurance companies to offer inflation protection with their LTCI policies. Some provide it as part of the base policy. Others offer inflation protection riders. Insurers typically offer inflation protection in one of two ways: automatically or by special offer.
Automatic inflation protection
Policies or riders that offer automatic inflation adjustments use either a simple or a compound method to increase the daily benefit amount by a fixed percentage.
Using a 5-percent simple option, the benefit amount would increase by 5 percent a year. That means a $150 daily benefit would increase by $7.50 each year. So after 20 years, the daily benefit would be $300. The 5-percent simple option is a relatively inexpensive inflation-protection option for people who may need benefits in the early years of the insurance policy. These include people who are elderly when they purchase LTCI coverage.
The 5-percent compound option means the dollar amount of the benefit increase would be higher each year, like compound interest in a bank account. For example, a $150 daily benefit would increase by 5 percent, to approximately $158 after the first year. The new daily benefit amount would increase by 5 percent the next year to approximately $166, and so on. By year 20, the daily benefit would be $382. This option provides the best inflation protection for younger people who do not expect to need benefits for many years.
Special offer—inflation protection
Some policies offer insureds the opportunity to increase the daily benefit amount (with a corresponding increase in premium) at set intervals, typically every two or three years. While this guaranteed purchase option (GPO) can be expensive for younger people who will not need services for several years, it’s good for people who may have a more immediate need—those age 70 or older.
With the GPO, the daily benefit amount increases more rapidly in the early years of the policy—a definite benefit for elderly clients. However, after 20 years, the daily benefit amount, using a 5-percent compound option, exceeds that of the GPO. In addition, the total cost of premiums after 20 years is considerably less using the 5-percent compound option. This is something your younger clients should consider. Showing clients an illustration like this helps make your job easier because it allows them to see clearly the benefits of inflation protection.
What about clients who simply can’t afford to add an inflation-protection rider? As a last resort, they could select a daily benefit amount that’s higher than what they currently need in anticipation that the cost of long-term care services will rise. In other words, you could suggest they purchase the highest daily benefit amount they can afford today. Just be sure to discuss any possible tax implications. If clients collect benefits under a tax-qualified indemnity plan and the daily benefit amount received is greater than the actual daily charge for services, they could be taxed on the difference.
There’s no doubt that consumers are still confused about their long-term care options. Many think LTCI is too expensive. Others believe their health insurance or Medicare will cover the cost. The good news is this is beginning to change. The industry and the media are attempting to educate the American public. Consumers are seeking information on the internet. Baby Boomers, who may find themselves with the responsibility of caring for an aging parent, are planning for a different future. And with 30 or more years ahead of them, the need for an LTCI policy with inflation protection is very real.
The bottom line is this: We must discuss the rising cost of long-term care services with our clients and make sure they understand the importance of adding inflation protection to their policies. It’s our responsibility to educate clients so they can then make informed decisions.
Connie Schleich-Williams, LTCP, is a regional training specialist for Mutual of Omaha. She can be reached at connie.schleich-williams@ mutualofomaha.com.