Choosing the right inflation growth option may be one of the most important factors when buying an LTCI policy.
For example, a $200,000 LTCI policy purchased today may sound like a lot of coverage. But 10, 20, or 30 years from now when you need it, it may barely cover the care you need.
Why is that?
It’s all thanks to inflation. The cost of care rises with inflation each year on average by 1-4% which means your policy needs a steady inflation rider to keep up.
So, what’s the best inflation growth option for your LTCI policy? The following are a few of the top inflation options.
Please note, inflation rider names and options may vary by insurance company. Work with an LTC Specialist to learn about the unique inflation options available for each carrier.
5% Compound Inflation
The most generous inflation option (and the most expensive one) is 5% compound inflation. This inflation option grows your pool of benefits at 5% each year on a compounding basis.
Because inflation hasn’t grown consistently at 5% or more in the last decade, carriers have been forced to raise the cost of this inflation option. The premium hike has made this option too expensive for many buyers. Because of this, carriers are getting more creative with affordable alternative inflation options.
5% Simple Inflation
The 5% simple inflation rider grows your pool of benefits at 5% each year based on your original benefit. Unlike 5% compound, this inflation option does not compound over time. This means you won’t grow your benefit nearly as much as with compounding inflation.
Consumers may purchase this option if they’re looking for a more affordable solution. However, we may suggest consumers consider the next option first – 3% compound inflation.
3% Compound Inflation
Compounding inflation helps you grow your benefit the most over time. 3% compound inflation entered the market as an affordable alternative to the expensive 5% compound inflation.
If it fits within a consumer’s budget and needs, most often we steer consumers toward this option. It protects your benefit with compounding growth each year to help keep up with the rising cost of care.
The best part? You set it and forget it! It compounds automatically each year which means you don’t need to do anything.
Guaranteed Purchase Option (GPO)
GPO inflation is also known as Future Purchase Option (FPO) by some insurance carriers. This inflation option allows you to add inflation coverage later, should you chose it.
For example, every two to three years you’ll be offered the opportunity to add inflation coverage to your policy.
The downside – rates for the increase in coverage are based on your current age. Also, in most cases, if you decline increases more than twice in a row, you’ll no longer be offered the option to increase your coverage in the future.
Unlike the “set it and forget it” options, GPO inflation requires more work on your part. It may be an affordable option to start, but it could end up costing you more in the long run.
Inflation Growth Option Graph
This graph shows how your pool of money grows over time with inflation coverage.
Need help to decide the best inflation option for your LTCI policy? Check rates on our quote tool and speak with an LTC Specialist about additional options available in your state.
LTC Consumer is an independent, free online service to help consumers understand what long term care insurance is, how it works, and how to evaluate coverage options. Our mission is to provide an educational, no-pressure resource for learning about long term care planning, with the opportunity to speak with specialists who can help them.