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 are typically at a fixed rate of 3, 4, or 5%, they could be simple or compound, and the rate is specified by you at the time you apply for your policy.

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 are actually tied to the increase (or, dream on, the decrease) in the rate of health care cost inflation. And a 5% compound inflation rate typically more than doubles the cost of a traditional long-term care policy. Varying the inflation factor from zero to 5% in hybrid policy quotes similarly has a substantial impact on the cost and benefits of such products.

What to do? Once again, tailor your policy to your needs and budget. Examine alternatives, and this is important, make sure that they are based on the same health underwriting class for which you have been pre-qualified by each company providing the alternative quotes. Be sure to establish basic benefit specifications so that you are getting fair competitive comparisons.

If you are considering buying a traditional long-term care policy, make one of the alternatives you examine a very large monthly benefit (e.g., $10,000) with a 3, 4, or 5 year benefit period but with no inflation rider. Your annual premium will likely be less than the cost of the same policy with a $5,000 monthly benefit and a 3% or 5% compound inflation rider, and you will immediately have twice the benefit that it would take over 14 years to reach with a 5% compound provision or 24 years with a 3% compound 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 LTCI benefits. Take the time to work out comparatively and competitively what makes the most sense for you.