Is there something called inflation protection that I need to look for in a long term care policy? What's it all about?
Total Comments: 24
Posted: Mon Dec 07, 2009 09:09 pm Post Subject:
It will have to do with adjusting the payment amount for inflation annually to ensure that the real value of your payout remains the same every year.
$10,000 is worth less now that it was 10 years ago and a lot less than it was 20 years ago, so if you are looking at a policy designed to provide long term benefits it's important to think about inflation adjusting.
Because you set the benefit NOW, you need to know that what you will be getting in 10 years or so will still be equivalent. Inflation adjusting helps with this.
Posted: Tue Dec 08, 2009 07:22 am Post Subject:
It's truly important to have inflation protection within your long term care policy. If you don't make sure of this while signing up, then you might be shocked to know through some stage that your benefits would actually feed just a portion of your long term care costs in the future. The insurance benefits (with some policies) would some times fail to live up to the rising service costs. Under such circumstances, you'd need to bear the difference between the actual cost and the insurance payment based on previous costs. Roddick
Posted: Tue Dec 08, 2009 05:05 pm Post Subject:
Most states are allowing "partnership" policies since the 2005 legislation of the Deficit Reduction Act (DRA) which essentially repealed the Waxman Amendment.
Partnership policy states adhere to the NAICs Model LTC Act which requires the offer of at least a 5% compounded benefit or similar benefit allowed by state law. There are many ways that an insurer can offer inflation protection and I would be glad to discuss them if asked.
Both roddick and heidrek are on-point with this. A LTC policy purchased today would likely be woefully inadequate 25 years from now in terms of benefits purchased. Inflation will have eaten a big hole in the purchasing power of the coverage; inflation protection should be considered an absolute part of the contract.
If you're worried about the premium costs rising every year due to the inflation-produced coverage, many companies will offer a "future purchase option" or "guaranteed insurability option" which will allow the insured to purchase additional amounts of coverage in the future without any insurability concerns.
InsTeacher 8)
Posted: Wed Dec 09, 2009 06:04 am Post Subject:
There are many ways that an insurer can offer inflation protection and I would be glad to discuss them if asked.
Well Teacher, I guess this is the right thread and opportunity for you to mention it over here. So, please go ahead and share the ways to add to everyone's knowledge.
Posted: Wed Dec 09, 2009 01:53 pm Post Subject:
Inflation protection is one of the most important aspects of an LTCI policy. To purchase without it is a huge mistake. With the possible exception of a person in their 80s, Partnership policies require that inflation protection be purchased, it is not an option, and in California, 5% compound is the norm.
Future/guaranteed purchase options in other forms of LTCI are valuable, but can become costly as age overtakes, and a day will probably come when the next increase will be unaffordable. The 5% simple or compound options, while a bit costlier upfront, are more lucrative in the long run. 5% simple will double the daily benefit over 20 years, 5% compound will nearly triple it.
If you're concerned about your future ability to pay the premium, and you're at least age 59-1/2 at the end of the first year, a flexible premium deferred annuity funded to at least 15-20 times the annual premium and earning a 5% rate of return will pay up to 30 years of annual premiums or more, and without a surrender penalty in most annuities. There will be a bit of a taxable event on each withdrawal. If premiums go up or interest crediting rates drop, you could always add more money to the annuity later in life as needed. (A $2000 annual premium would require an initial annuity contribution of just $30,000 to $40,000.) If you die, your beneficiary receives the balance of funds in the annuity, because you are not annuitizing, but merely making a annual withdrawal.
The single biggest reason to purchase a Partnership policy (if available in your state) is the protection from the Medicaid spend down test if you exhaust the LTCI benefit and still require LTC services. You receive a $ for $ exemption from the spend down for every dollar of benefit paid from your LTC policy. For most people, that means a free pass into the Medicaid system at that point.
Understand, however, that Medicaid is a no interest loan. For every dollar paid by Medicaid on your behalf after age 50, the state has an equal lien on your estate following your death. The one asset they are most likely to come after is your home. It's hand's off as long as your spouse is still living there, but they cannot sell the property without removing the lien.
Posted: Thu Dec 10, 2009 06:12 am Post Subject:
Guys, remember that if you're going for 5% inflation protection, you might see through a 5% increase in benefits every year. So, with this yearly adjustment the overall worth of benefit would rise to cope with the rising ltc costs.
Posted: Fri Dec 11, 2009 01:15 am Post Subject:
if you're going for 5% inflation protection, you might see through a 5% increase in benefits every year.
Not exactly sure what you mean by this.
So, with this yearly adjustment the overall worth of benefit would rise to cope with the rising ltc costs.
Exactly! That's the purpose of inflation protection. 5% simple adds 15-20% to the base premium, 5% compound adds about 20-30%.
So if a person is going to choose the compound option, and a Partnership policy is available in the state, since the Partnership policy does not cost more (true at least in California), it would probably be in the insured's best interest to have that.
In California, there are only a few companies offering Partnership policies (all large, reputable companies, with good LTC products), and agents are required to have additional Continuing Education to be approved to market them.
Some agents just don't want to spend the extra $85 every two years for the CE to help benefit their clients, even though the commission on one Partnership policy transaction will easily pay for at least 15 or 20 CE courses. Others simply don't understand the benefit of a Partnership policy.
Posted: Fri Dec 11, 2009 06:40 am Post Subject:
I was pointing at the annually compounded inflation protection. Suppose the policy was originally written with
Ltc service worth $ 150 a day and a 5% adjustment each year. I guess it would come to $ 157.5 a day on the
second year. The yearly adjustment would be done every year. This in turn would affect the overall worth of benefit leading it to increase for the entire policy life.
Posted: Fri Dec 11, 2009 12:17 pm Post Subject:
Yes, you're 100% correct.
Posted: Mon Dec 14, 2009 08:51 am Post Subject:
There are some specifications regarding the inflation protection percentage selection. It may even vary as per the age of the applicant. So it's better to get things evaluated by an LTC specialist. However, without inflation protection, the gap between the policy benefit and the cost of Ltc would widen.
Posted: Mon Dec 07, 2009 09:09 pm Post Subject:
It will have to do with adjusting the payment amount for inflation annually to ensure that the real value of your payout remains the same every year.
$10,000 is worth less now that it was 10 years ago and a lot less than it was 20 years ago, so if you are looking at a policy designed to provide long term benefits it's important to think about inflation adjusting.
Because you set the benefit NOW, you need to know that what you will be getting in 10 years or so will still be equivalent. Inflation adjusting helps with this.
Posted: Tue Dec 08, 2009 07:22 am Post Subject:
It's truly important to have inflation protection within your long term care policy. If you don't make sure of this while signing up, then you might be shocked to know through some stage that your benefits would actually feed just a portion of your long term care costs in the future. The insurance benefits (with some policies) would some times fail to live up to the rising service costs. Under such circumstances, you'd need to bear the difference between the actual cost and the insurance payment based on previous costs. Roddick
Posted: Tue Dec 08, 2009 05:05 pm Post Subject:
Most states are allowing "partnership" policies since the 2005 legislation of the Deficit Reduction Act (DRA) which essentially repealed the Waxman Amendment.
Partnership policy states adhere to the NAICs Model LTC Act which requires the offer of at least a 5% compounded benefit or similar benefit allowed by state law. There are many ways that an insurer can offer inflation protection and I would be glad to discuss them if asked.
Both roddick and heidrek are on-point with this. A LTC policy purchased today would likely be woefully inadequate 25 years from now in terms of benefits purchased. Inflation will have eaten a big hole in the purchasing power of the coverage; inflation protection should be considered an absolute part of the contract.
If you're worried about the premium costs rising every year due to the inflation-produced coverage, many companies will offer a "future purchase option" or "guaranteed insurability option" which will allow the insured to purchase additional amounts of coverage in the future without any insurability concerns.
InsTeacher 8)
Posted: Wed Dec 09, 2009 06:04 am Post Subject:
There are many ways that an insurer can offer inflation protection and I would be glad to discuss them if asked.
Well Teacher, I guess this is the right thread and opportunity for you to mention it over here. So, please go ahead and share the ways to add to everyone's knowledge.
Posted: Wed Dec 09, 2009 01:53 pm Post Subject:
Inflation protection is one of the most important aspects of an LTCI policy. To purchase without it is a huge mistake. With the possible exception of a person in their 80s, Partnership policies require that inflation protection be purchased, it is not an option, and in California, 5% compound is the norm.
Future/guaranteed purchase options in other forms of LTCI are valuable, but can become costly as age overtakes, and a day will probably come when the next increase will be unaffordable. The 5% simple or compound options, while a bit costlier upfront, are more lucrative in the long run. 5% simple will double the daily benefit over 20 years, 5% compound will nearly triple it.
If you're concerned about your future ability to pay the premium, and you're at least age 59-1/2 at the end of the first year, a flexible premium deferred annuity funded to at least 15-20 times the annual premium and earning a 5% rate of return will pay up to 30 years of annual premiums or more, and without a surrender penalty in most annuities. There will be a bit of a taxable event on each withdrawal. If premiums go up or interest crediting rates drop, you could always add more money to the annuity later in life as needed. (A $2000 annual premium would require an initial annuity contribution of just $30,000 to $40,000.) If you die, your beneficiary receives the balance of funds in the annuity, because you are not annuitizing, but merely making a annual withdrawal.
The single biggest reason to purchase a Partnership policy (if available in your state) is the protection from the Medicaid spend down test if you exhaust the LTCI benefit and still require LTC services. You receive a $ for $ exemption from the spend down for every dollar of benefit paid from your LTC policy. For most people, that means a free pass into the Medicaid system at that point.
Understand, however, that Medicaid is a no interest loan. For every dollar paid by Medicaid on your behalf after age 50, the state has an equal lien on your estate following your death. The one asset they are most likely to come after is your home. It's hand's off as long as your spouse is still living there, but they cannot sell the property without removing the lien.
Posted: Thu Dec 10, 2009 06:12 am Post Subject:
Guys, remember that if you're going for 5% inflation protection, you might see through a 5% increase in benefits every year. So, with this yearly adjustment the overall worth of benefit would rise to cope with the rising ltc costs.
Posted: Fri Dec 11, 2009 01:15 am Post Subject:
if you're going for 5% inflation protection, you might see through a 5% increase in benefits every year.
Not exactly sure what you mean by this.
So, with this yearly adjustment the overall worth of benefit would rise to cope with the rising ltc costs.
Exactly! That's the purpose of inflation protection. 5% simple adds 15-20% to the base premium, 5% compound adds about 20-30%.
So if a person is going to choose the compound option, and a Partnership policy is available in the state, since the Partnership policy does not cost more (true at least in California), it would probably be in the insured's best interest to have that.
In California, there are only a few companies offering Partnership policies (all large, reputable companies, with good LTC products), and agents are required to have additional Continuing Education to be approved to market them.
Some agents just don't want to spend the extra $85 every two years for the CE to help benefit their clients, even though the commission on one Partnership policy transaction will easily pay for at least 15 or 20 CE courses. Others simply don't understand the benefit of a Partnership policy.
Posted: Fri Dec 11, 2009 06:40 am Post Subject:
I was pointing at the annually compounded inflation protection. Suppose the policy was originally written with
Ltc service worth $ 150 a day and a 5% adjustment each year. I guess it would come to $ 157.5 a day on the
second year. The yearly adjustment would be done every year. This in turn would affect the overall worth of benefit leading it to increase for the entire policy life.
Posted: Fri Dec 11, 2009 12:17 pm Post Subject:
Yes, you're 100% correct.
Posted: Mon Dec 14, 2009 08:51 am Post Subject:
There are some specifications regarding the inflation protection percentage selection. It may even vary as per the age of the applicant. So it's better to get things evaluated by an LTC specialist. However, without inflation protection, the gap between the policy benefit and the cost of Ltc would widen.
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