Can My Benefit Increase?

Yes, if you have an “inflation rider”.  That’s the term often used to describe optional provisions offered by insurers which automatically increase your policy benefits each year.  The increases could be at a fixed rate of 3, 4, or 5%, and they could be compound or simple, or be based on some factor such as the Consumer Price Index. 

A compound rate means that the increase is based on the prior year’s benefit amount.  Simple means that the increase is based on the original benefit amount.  A 5% compound rate will double your benefit in 14.4 years. A 3% compound rate will take 24 years to double your benefit.  At a 5% simple rate, it will take 20 years for your original benefit to double.

Here’s the problem.  None of those numbers is actually tied to the increase (or, dream on, decrease) in the rate of health care cost inflation.  And a 5% compound inflation rider typically more than doubles the cost of a policy.

What to do?  Once again, tailor your policy to your needs and budget.  Check out the current costs of at least three major, well rated LTC carriers with, and this is important, with the same underwriting class for which you have been pre-qualified by the individual company, and with the same policy specifications with each company.  Require a policy and premium side-by-side comparison showing each company.

Also, consider buying a very large benefit (for example, $10,000 or $12,000 a month with a 3, 4, or 5 year benefit period) but with no inflation rider.  Your premium will be less than the cost of the same policy with a 3 or 5% compound rider, and you will immediately have at least twice the benefit that it would take over 14 years to have with a 5% compound automatic annual benefit increase or 24 years with a 3% compound annual increase rider.

True, your benefit won’t increase, but your financial vulnerability to the cost of long-term care should also diminish as your obligations (mortgage, education of children) lessen in retirement.  And you will still have the up-front protection of a very large monthly benefit to off-set long-term care costs should you need care sooner rather than later.

The take away point here is that there are many different ways to structure LTC benefits.  Take the time to work out comparatively and competitively what makes the most sense for you.