Inflation protection is one of the most important optional features.  It provides for increases in benefit levels to help pay for expected increases in the costs of long-term care services in the future.  It is estimated that long-term care costs are going up about 5% - 7% per year, so it is important to design a plan that will be sufficient at the point of need.  The only thing worse than going broke in a nursing home, is going broke in a nursing home with insurance.

There are two types of inflation protection available—simple and compound.   

Compound Inflation protection    With compound inflation protection, the daily maximum benefit and the lifetime benefit amount increase 5% per year, but the 5% amount added is figured on the previous year’s total.  For the first ten years or so, there is not much difference in how the benefit increases.  However, over twenty or thirty years, compound inflation protection makes a huge difference.  So a policy that pays $100 per day now, will pay $265 per day in 20 years. 

Even though compound inflation protection is more expensive, it is worthwhile to build it in at the beginning so that one can be assured of an adequate plan at the point of accessing long-term care benefits.  What your premium costs at the beginning is not as important as what you pay for insurance toward the end of your life.  Building inflation protection in up front allows your premiums to remain stable while your benefit maximums increase over time. 

 Simple Inflation protection  provides that the daily maximum benefit and the lifetime benefit amount will increase 5% per year.  Taking 5% of the original amounts and adding that same amount each year determines the amount of yearly increase.  For example, a policy that provides for $100/day for four years would have a lifetime benefit maximum of $146,000.  With simple inflation protection, the daily benefit of $100/day would increase $5 per year, and the benefit maximum would go up by $7,300 each year. 

So, a policy that pays $100/day today will pay $200/day in 20 years. 

Consider the clients’ assets, their ability to self-insure some amount of their care, and their age. Although it is always recommended that Compound Inflation Protection be added, an older person (age 80) might opt for Simple Inflation Protection. 

Another alternative is to have the client purchase a higher daily benefit now, knowing that eventually that amount will equal the cost of care later. This is an example of a time when it is very important to have done a thorough fact finding mission with the client regarding their assets, and also to have educated them clearly o the benefits of inflation protection.