LTC Basics - Inflation Protection

One of the more important aspects of a long term care policy is inflation protection. What it does is grow your daily or monthly benefit each year so that in the future it will pay for the same things that it does today. It is an option that most people should add.

There are a number of choices you have available to you:

• None - This means your daily benefit does not grow at all. The amount you have today is the same amount you will have in the future.
• GPO - Guaranteed Purchase Option. Your policy does not start with any inflation protection, but you have the option of adding some every 2 to 3 years (depending upon the company). Your premium will increase each time you add to the benefit. This option is good if you are older and live longer than you thought you would.
• Simple or Equal - You benefit will increase each year by 5% of the original amount. For example: if your benefit is $100/day, then it will grow by $5 each year. Your benefit will double about every 20 years. Your premium does not increase just because your benefit is growing. The cost for these increases is built in up front.
• Compound - There are multiple flavors of compound inflation protection. The most common one is 5% lifetime. Your benefit will grow at 5% of the previous year's benefit. For example: if your benefit is $100/day, then it will grow by 5% of $100 the first year and 5% of $105 the second year and 5% of $111 the next year, and so on. Your benefit doubles approximately every 15 years. There are two variations of the compound worth mentioning. The first is 3% compound, meaning your benefit grows at 3% of the previous year's benefit. The other is Two-Times Compound. With this option, your money grows until it has doubled (about 15 years) and then stops growing.

How do you know which one to go with? Work with a long term care specialist. It's really a matter of your current financial situation and affordability of premium. A rule of thumb is that if you think you'll need care in 7 years or less, then get a decent daily benefit and go with None or GPO. If it will be less than 15 years, then simple or equal. If you think it could be 15 or more years then go with compound.