Inflation Options in Long-term Care Insurance

It used to be easy to pick an inflation option for a long-term care insurance policy, because there were so few choices. In the early days of product availability, the options were: 5 percent simple, 5 percent compound and a guaranteed purchase option to buy additional benefits later on. At the start of the long-term care insurance era — nearly 30 years ago — policies did not typically include any inflation option.

Gradually, carriers introduced first the 5 percent simple option for a period of years, followed by the 5 percent compound. Over time, they again extended that inflation rider. (One historical note is that 5 percent simple or 5 percent compound doesn’t seem to have much basis in actual claims history. It seems to have been chosen because the 5 percent simple rider was a nice even number to deduct from the original daily benefit amount.) Today, partly because of cost and much better tracked claims data, insurance companies offer a number of other inflation choices for agents to recommend to their clients and prospects.

Driving factors in LTCI costs

Agents today need to help their clients understand that, despite popular opinion, the drivers for long-term care costs are not the same as they are for acute care costs like hospitalization, surgeries or physician’s diagnoses and treatment. The media has publicized that health care costs, including premiums for health insurance, have been going up well above the consumer price index for the last decade or more. Long-term care costs are driven by labor costs that have not been rising at the same pace and have generally been around the consumer price index for quite some time now. This might suggest that the 5 percent simple and 5 percent compound riders are more coverage than most people need.

Insurers have been rather aggressively encouraging long-term care insurance customers to look at the new inflation options by pricing them more attractively, particularly with the press coverage about how high long-term care insurance premiums can be these days.

Here’s the rundown on some of what you can expect to find available from insurers:

• 5 percent simple inflation riders remain available and can still be a decent choice for some, especially those in their 60s. Somewhat older clients won’t typically have as many years of inflation to worry about.
• 5 percent compound inflation riders are also still widely offered, but have been priced at the high end of the spectrum, so most agents will probably want to look elsewhere. Historically, these options have more often been subject to price increases.
• 5 percent compound inflation rider variation with a two times initial benefit maximum; this option can also help keep rider costs in check, but could leave the policyholder underinsured later in life
• Guaranteed purchase options, which have no built-in or automatic inflation, are typically the lowest cost and usually offer additional increases at a higher price, which goes up as the customer gets older. This option is common in employer-provided plans and is often chosen because of its lower initial cost as people forget about the impact of inflation and don’t understand that they’ll face much higher premiums later on if they routinely purchase the additional options made available to them.
• CPI or consumer price indexed compound inflation options are priced attractively compared to the first two options, and track the pace of rising long-term care costs reasonably well. Plus, they are better designed to handle periods of higher inflation in the future.
• 3 percent compound inflation riders can be a good choice for many, both for cost reasons and because these riders also track the long-term general inflation average (between 3 and 3.5 percent). This rider might not cover periods of higher inflation as well as the CPI inflation rider, however.

In the end, your client will want to carefully review their choices to determine the inflation rider that best suits their needs. If they expect a lump sum windfall like an inheritance or the sale of some real estate later in life, they may be able to choose one of the less comprehensive inflation riders. And, as with many types of insurance that incorporate cost-sharing through creative use of deductibles and co-insurance, your clients may well plan to use that rationale with the inflation rider they select.

Stuart H. Armstrong is a John Hancock Life Insurance Company agent with Centinel Financial Group. He can be reached at 617-424-0005 or [email protected].

For more exclusive LTCI coverage, visit ASJ’s LTCI Resource Center.