Today’s blog post continues the series about buying long term care insurance as a strategy for planning ahead for long term care. My post of May 22, 2014 discussed whether to buy long term care insurance at all. My post of May 29, 2014 suggested looking for a stable, proven insurer. My post of June 5, 2014 described how to identify a proven, stable Long Term Care insurance company. The introductory post in the series on planning ahead for long term care costs appeared on May 15, 2014.
As my next suggestion on long term care insurance, I urge you to include inflation protection in your long term care insurance policy.
The insurance company will look at today’s costs of long term care in determining the policy’s payout. You don’t expect to make a claim against the policy until many years from now though. By that time, however, prices for long term care, like prices for everything else, will almost surely increase significantly. (Prices for long term care and for health care have often gone up more quickly than overall consumer prices.) If you fail to get inflation protection, the payout could be very little compared to your long term care costs.
Get compound inflation protection rather than simple inflation protection (like compound interest rather than simple interest.) Simple inflation protection calculates the price increase from the base amount, the payout level in the year you bought the policy. (For example, if you purchase a policy that will pay out $200 per day with simple 5% inflation protection, it will have a $210 payout in year two, a $220 payout in year three, a $230 payout in year four, etc.) Compound inflation protection builds on each year’s growth, like getting interest on last year’s interest. (For example, that same $200 per day base would have a $210 payout in year two, a $220.05 payout in year three, a $231.53 payout in year four, etc.) That may not seem like a big difference, but please remember that you buy long term care insurance hoping not to need it for a long time, and the difference between the two policies will only get bigger over time. That $200 per day policy in our example would grow to $400 per day in twenty year with simple inflation protection but would grow to $505.39 with compound inflation protection.
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