As
stated by many financial experts, Long
Term Care costs are expected to escalate approximately
three times in the next 20 years.
In order to
keep current, you will need a 5.7%
rate of inflation protection. While most companies offer either 5% compound or 5% simple
inflation protection, you will find that the compound option
will greatly increase your benefit amount over time.
For those under age 70, this is usually the recommended
option.
What
is the difference between compound and simple inflation
protection?
While
premiums are level, simple inflation benefits increase
by a percent of the original benefit each year while
compound benefits increase the original benefit plus
previous increments. Therefore, after the first
couple of years, the benefit amount is significantly
increased. For example, if you have a $200 daily
benefit and your policy has been enforce for 15 years,
with 5% simple inflation protection, your daily benefit
would increase to $340 and your annual payout would be $124,100. With compound inflation, your daily
benefit would be $396 and your annual payout would be $144,535.
The
actual cost difference in the premium between the two
options is minimal as compared to the increase in
benefit amount. It is so important to ensure what
you purchase today is relevant for tomorrow.
When comparing
policies, be sure to note if increases are affected
by benefit payments. For some policies, the
increases are based on the original benefit amount while
in other policies, the increases are affected by benefit
payments. For the latter, this means if a policy
holder goes on claim, future increases will be reduced
by benefits paid. This is called claims offset.
Policies with no claim offset actually provide a greater
amount benefits.
The following
chart illustrates the difference between simple and compound inflation protection over a 30 year period
using daily benefit amounts of $200, $250 and $300.
