Q. I need some guidance about the inflation protection benefit. Adding this to the policy really increases the premium. Is this benefit necessary, and if so, could you provide guidelines about when to recommend it?
This month, we continue on the topic of inflation protection guidelines, covering what the new Partnership policies will be requiring and the guidelines used by Arthur Stein, a Maryland agent.
Understanding the significance of the inflation protection benefit is now even more important as a result of the new Partnership plans virtually every state will be adopting. Exceptions are the four existing Partnership states ?? 1/2 California, Connecticut, Indiana and New York. The new Partnership plans will require the following:
- Ages 0 to 60 ?? 1/2 compound inflation protection required
- Ages 61 to 75 ?? 1/2 some form of inflation protection is required
- Ages 76 plus ?? 1/2 no inflation protection requirements; may be purchased by choice
Be aware that the Deficit Reduction Act does not clarify what is meant by inflation protection or stipulate what types qualify, so states can set their own standards. For example, the DRA does not specifically mandate the 5 percent compound rate that is required by the original partnership programs. Therefore some states are likely to accept other compound rates, such as 3 percent as well as inflation protection based on a consumer price index that increases annually on a compound basis. Some states may even accept a guaranteed purchase option.
Stein is a forceful advocate for compound inflation protection for all ages. ?? 1/2 The compound inflation adjustment is expensive. However, higher daily benefits, shorter elimination periods, longer benefit periods and home care are also expensive,?? 1/2 Stein says. ?? 1/2 The question is, what is the best mix of benefits when purchasers have limited spending power??? 1/2
To answer that question, Stein says compare daily benefits with and without the compound rider but with the same premium. You then have a choice between two sets of benefits that cost the same: A higher daily benefit with no inflation adjustment or a lower daily benefit with the compound rider.
Stein says one well-known company charges 79-year-olds these amounts for a three-year policy, 90-day elimination period with no health or spousal discounts: $7,890 per year for a $100 per day policy with the compound rider; and $7,946 per year for a $145 per day policy with no inflation adjustment.
After only eight years, the $100 per day compounded policy has a slightly higher daily benefit than the $140 per day policy. The policy with the compound rider then has an increasingly higher benefit.
?? 1/2 The chances of using the policy increase with age. Therefore, choosing higher daily benefits with no inflation adjustment leave the policyholders overinsured when they are younger and least likely to use the benefits, and underinsured when they are older and more likely to use the benefits. The compound rider is the better long-term decision,?? 1/2 Stein says.
?? 1/2 The simple inflation adjustment is not a good choice because it does not solve the problem of increasing prices,?? 1/2 he says. Inflation is compound interest, not simple interest. The worst choice, Stein says, is the future purchase option (guaranteed purchase option, CPI or indexed inflation adjustment). Every time the daily benefit increases, the premium also increases. The percentage increase in premium is larger every time even though the increase in the benefit is the same compound 5 percent per year.
?? 1/2 This is a bad choice because, while cheaper in the beginning, premiums are much more expensive in the long run. If the policyholder declines the adjustment a certain number of times, the company stops offering it to them,?? 1/2 Stein says. ?? 1/2 Once the policyholder starts receiving benefits, the company stops offering it to them.?? 1/2
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