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Is an inflation rider critical to a long-term care plan?

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I read with a smile on my face the news release from the American Association for Long-Term Care Insurance (AALTCI) regarding buyers purchasing less inflation protection on long-term care insurance (LTCI) plans in 2014. The release stated that the selection of the 5 percent inflation option on LTCI plans dropped from 51 percent in 2012 to 14.5 percent in 2014.

The 5 percent inflation option has steadily increased in price to the point of making LTCI unaffordable for many consumers. As a fall back, many agents just started quoting the 3 percent option that most carriers offered. It certainly was less expensive but still high enough to dissuade many consumers from purchasing LTCI.

Now, I am not one to downplay the importance of benefit growth in a long-term care (LTC) plan, but there is another viable option that agents can consider. It is simply called a “bulk benefit.”

We did an analysis of carrier rate increases about three years ago and looked at the plans that were subjected to rate increases and what benefits were included in those plans. The commonality was long duration of benefit periods and the compounded inflation rider. From that we looked to see what could be designed into a long-term care plan, have adequate benefits and still be affordable. Hence, the “bulk benefit.”

For example, take a couple aged 57 and 60 buying a $5,000 a month benefit with 5 percent compound inflation for a five-year benefit duration. The cost from one of the top three carriers would be approximately $8,800 in annual premium. Yes, unaffordable for most or they just aren’t interested in paying that kind of annual premium. If you went with the 3 percent option, that premium would be approximately $4,850.

Now look at the alternative foregoing inflation protection altogether. Use a four-year duration of benefits but design the plan at $10,000 per month. You have doubled the benefit from the beginning, and this is where your inflation protection is. What’s the cost? About $4,900 annually.

The crossover where the two designed plans will be equal to one another would be ages 72 and 75 for 5 percent compounded inflation and 78 and 81 with 3 percent compounded. If the claim happened in the early ownership of the LTCI plan, certainly bulk benefit would be more desirable.

Looking at life expectancy, and the reality that most consumers don’t buy LTCI to cover 100 percent of the risk, this method starts to look attractive.

We have to be aware that using this method of plan design takes the LTCI Partnership out of the equation. That has to be part of conversation with the client.

Significant assets many times make the Partnership a non-issue, but the conversation needs to be conducted with the client. The purpose of the partnership program provision included in the Deficit Reduction Act of 2005 (DRA) was to get more consumers to purchase private LTCI coverage and this model makes it a bit more affordable.

When fully explained and a review of all the options and a premium comparison is completed, we see clients opt for the bulk benefit more often than not. Having immediate large benefits versus the traditional and now more expensive long-term care plan with that slow growth makes sense to a lot of consumers. These are reimbursement policies, so if the entire benefit isn’t used in a given month, the remaining pool is available for future delivery. It just makes sense to a lot of potential clients.

See also: Taking care of our fathers’ generation