The Solution - Inflation Protection
A long term care insurance policy with inflation protection (IP), sometimes called an increase rider, increases your benefits each year. A long term care insurance policy without inflation decreases in value, on an inflation adjusted basis, every year the cost of long term care increases. Differentiating between the two most common forms of inflation protection is critical in determining which type is best for your needs.
Simple Inflation Protection
With simple inflation protection, your policy benefits increase at a fixed percentage of your original daily benefit. A 5% simple IP policy will increase a $220 per day or $80,000 per year benefit to $495 per day or $180,000 per year, over the course of 25 years. This should cover about 53% of your daily or annual nursing home costs.
Compound Inflation Protection
With compound IP, your policy benefits increase at a significantly faster pace, as each year's benefit increase compounds upon the previous year's increase. As evidenced by the chart to the right, a 5% compound inflation protection policy will increase a $220 per day or $80,000 per year benefit to approximately $930 per day or $340,000 per year, over the course of 25 years. This should cover about 80% of your daily or annual nursing home costs.
No Inflation Protection
As you approach your 80th birthday, the cost to add inflation protection can become expensive. You may consider foregoing inflation protection and simply obtaining a policy with a daily benefit greater than the current cost of care in the marketplace.