Why Your Long-Term Care Insurance Benefits Might Shrink Over Time (And How to Prevent It)
Long term care insurance is critically important, and – as we wrote about recently – the recent Medicaid cuts are yet another example of how important LTC Insurance is. Long term care insurance is one of the only ways to protect your savings from the skyrocketing costs of long term care, as well as get better support and protect your assets for your heirs.
Most experts recommend that essentially *everyone* strongly consider long term care insurance as a part of their financial plan.
Still, many policyholders do not realize that inflation can silently erode their benefits over the course of decades. While so many of us are focused on the cost of eggs, beef, and housing, it’s important to realize that *all* costs go up when inflation goes up, and someone that buys a policy now may find that their policy covers much less in the future.
Spoiler: The purpose of this post is to remind you to ask about what’s known as an “inflation rider.” This rider adds inflation adjustments to your policy, helping protect you from inflation. When you contact our team at LTCR Pacific, ask about an insurance rider.
Real World Example
Let’s say you bought a policy 20 years ago, in 2005. In 2005, the median cost out of pocket for a nursing home was ~$60,000. Just 5 years later, in 2010, the average nursing home cost $75,000 a year. In 5 years, your policy already would have covered only 80% of what it covered in 2005.
Now, let’s say you bought that policy in 2005, and you need a nursing home now. How much would it cost?
The answer is about $9500 per month, or $114,000.
So, if you had a policy based on 2005 numbers, expected to pay $150/day for 3 years (about $164,000 total), you would be covering only a small fraction of the daily rate of your long term care by 2025.
Inflation and the Possibility of a Fixed Benefit Problem
Inflation has put a strain on many of our finances these days. It’s also a reminder that the costs we have today are unlikely to be the costs in 20 year. Nursing homes, for example, that cost $100,000/year now could exceed $200,000 a year in 20 years.
Some long term care insurance policies are designed to pay out a fixed daily or monthly rate. That rate may cover less of your nursing home needs the later you access it.
How Can You Protect Yourself From Inflation?
Keep in mind, all of your policy decisions need to be based on your specific financial situation. Those with a great retirement may have more than enough to cover the difference, but for others, you may need to look into inflation protection.
Most of our polices have what are known as “inflation protection riders” available. This is an optional insurance addition that increases the benefits annually based on either:
- Set inflation number, like 3% per year.
- Simple vs. compound interest.
These riders cost more, and so many people refuse these riders, but they adjust your policy every year in a way that should help cover some, most, or all of the costs associated with inflation. That makes them highly beneficial, and something more policy owners should consider.
You can also ask about other types of policies. For example, some hybrid policies and new policies link benefits to actual care or offer flexible coverage adjustments. These can help you prepare for the future, protecting yourself and your finances.
Above all, don’t fall into the trap of assuming you won’t need the coverage. Every situation is different, but if yours would benefit from inflation protection, it is strongly worth considering.
Long Term Care Insurance is Worth it – But Pick the Right Plan for You
LTC Insurance is one of the most effective, and one of the only, tools available for helping pay for long term care. It remains an extremely important financial tool, and while every situation is different, many financial advisors recommend LTCI.
But it is still important to consider how insurance might affect your policy, and whether or not you need an insurance rider. Many people are going to find themselves in a position to need an inflation rider.
So what can you do?
- If you are looking for a long term care insurance policy, strongly consider whether or not you might benefit from an inflation rider. Speak to your insurance rep about your options and think about how inflation may affect your finances in 20+ years.
- If you already have a long term care insurance policy without an insurance rider, it may be worth reaching out to LTCR Pacific anyway to see if you may benefit from a new policy. We have discounted premiums available, so we may already be able to offer you a lower rate, and we can see what your premiums will be with an insurance rider to see if it makes sense as part of your financial plan.
In any situation, LTCR Pacific wants to help you make the best choice for your long term care insurance needs. Reach out to LTCR Pacific today and let’s see what’s available to you.