Long Term Care University – Question of the Month – 08/15/16
By Aaron Skloff, AIF, CFA, MBA
Q: We are considering purchasing Long Term Care Insurance policies without inflation, with inflation protection built into the price and with inflation protection that increases the price of the policy each year. What are the advantages and disadvantages of each type?
The Problem – Determining Whether or Not to Purchase Inflation Protection
Most long term care insurance policies offer you the option to remove the inflation protection option from your policy when applying. Many consumers purchase an adequate amount of care per day (daily or monthly benefit) and care over the life of their policy (total pool of money) if they need care in the first year of owning their policy. Unfortunately, they shortchange themselves by not accounting for the rising cost of long term care services. They should purchase an amount of care adequate for the future cost of care. A policy with adequate coverage for the cost of care today, with inadequate or no inflation protection, simply cannot keep pace with the 3%-5% compound price increases long term care service providers have been implementing.
The Solution – Purchase an Adequate Amount of Care for Future Needs with Inflation Protection
Purchasing a policy with inflation protection built into the price (without premium increases) is more cost effective than a policy with a higher level of benefits today (without inflation and without premium increases).
Disadvantages of Inflation Protection
Higher initial premiums is the primary disadvantage to purchasing a policy with inflation protection. The secondary disadvantage is the unlikely need for a high level of care in the early years of the policy, before the inflation protection has increased the policy’s benefits.
Advantages of Inflation Protection
If long term care (LTC) expenses grow at the same 3%-5% compound rate they have in the past, and you purchase a policy with a low daily limit and low total pool of money, your benefits are likely to be inadequate for future costs. If you purchase a policy with 3% compound inflation protection and an adequate daily limit and total pool of money, your benefits are likely to be adequate for future costs.
Numbers Speak Louder than Words. Let’s look at a husband and wife that are each 55 years of age and are likely to need care in 25 years at the age of 80. They are comparing three policies. The chart below summarizes their combined benefits and premiums now and in 25 years.
Long Term Care Insurance Without Inflation Protection, Without Premium Increases. The primary advantage of this policy is the higher initial daily benefit and total pool of money. The primary disadvantage is the higher cumulative premiums over 25 years.
Long Term Care Insurance With 3% Compound Inflation Protection on Benefits and 3% Compound Inflation Protection on Premiums. The primary advantage of this policy is the lower initial premiums. The primary disadvantage is the lower initial daily benefit and total pool of money. This type of policy may be called ‘Future Purchase Option’ or ‘Step-Rated Compound Benefit Increase Option’.
Long Term Care Insurance With 3% Compound Inflation Protection on Benefits, Without Premiums Increases. The primary advantage of this policy is the lower cumulative premiums over 25 years. The primary disadvantage is the lower initial daily benefit and total pool of money.
Often Overlooked – Partnership Program and Compound Inflation
Most consumers must purchase a long term care insurance policy with inflation protection or the policy cannot be certified under the Partnership Program – the program that allows you to protect your assets away from Medicaid.
Action Step – Protect Yourself with Inflation Protection
Purchase a LTC policy with inflation protection so your future benefits will be adequate and you pay the lowest cumulative premiums.
Aaron Skloff, Accredited Investment Fiduciary (AIF), Chartered Financial Analyst (CFA) charter holder, Master of Business Administration (MBA), is the Chief Executive Officer of Skloff Financial Group, a Registered Investment Advisory firm. The firm specializes in financial planning and investment management services for high net worth individuals and benefits for small to middle sized companies. He can be contacted at www.skloff.com or 908-464-3060.