An inflation hedge for long-term care insurance

By Posted : 06/07/2013

long-term care insurance and inflationInflation gnaws on everything, including your long-term care insurance. But companies are increasingly offering a relatively new rider that eases the bite for those willing to pay for it, according to the American Association for Long-Term Care Insurance (AALTCI).

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The Guaranteed Purchase Option (GPO) gives you the opportunity to increase your protection every two to three years to reflect rising care costs tied to inflation. Another advantage: You don't have to take medical exams or shoulder increased premiums because of new medical conditions or poorer health, says Jesse Slome, the executive director of the AALTCI. (See: "Women to pay higher long-term care insurance rates.")

But, Slome points out, the cost of your premiums would rise based on your age when you exercise the option. And the GPO, also known as the Future Purchase Option (FPO), does add about 2 to 3 percent more to the annual cost of the policy. "That comes to about $5 more a month (or $60 a year) for most people, which we tend to see as being about 60 with about $165,000 in long-term care insurance," he says, noting that the projection is based on the AALTCI's 2013 Long-Term Care Insurance Price Index.

GPO trending in the long-term care insurance market

Long-term care insurance providers have offered GPOs for a few years, but Slome says the market for them has grown in the past year as consumers become more aware of them. (See: "Leaner and meaner: 7 long-term care insurance changes you need to know.")

"I'd say that about 10 percent of those with the insurance right now have a GPO or FPO, but we think that could approach as much as 50 percent" during the next few years, he says.

Slome adds that only about half of insurers currently offer GPOs or FPOs, and what they do offer varies significantly. He says some will let you have the option to increase coverage every two or three years as long as you continue to buy the rider. But others will stop offering the GPO if you reject hiking your coverage two or more times in a row."It's important to ask questions and find out exactly what the restrictions are, if any, before making a decision on them," Slome says.

GPOs are not the only way to protect long-term care insurance from inflation. There are standard simple inflation and compound inflation riders. These differ from GPO in that they automatically add benefit increases, while GPO does not. Simple inflation riders increase the original daily benefit by 5 percent every year automatically. Compound inflation typically adds 5 percent to the daily benefit and is compounded annually.

"While this guaranteed purchase option (GPO) can be expensive for younger people who will not need services for several years, it's good for people who may have a more immediate need -- those age 70 or older. With the GPO, the daily benefit amount increases more rapidly in the early years of the policy -- a definite benefit for elderly clients," Connie Schleich-Williams, LTCP, writes in Advisor Today, the website for the National Association of Insurance and Financial Advisors magazine.

To decide which inflation rider is best for your particular situation, you should speak with an experienced long-term care insurance advisor. Beyond inflation, there are other considerations when deciding to buy long-term care insurance. Here are four:

1. Sooner is better than later when it comes to long-term care insurance.

Rates go up as you grow older -- if you want long-term care insurance, get it while you're young enough to qualify for the best deal. (See: "Tips for buying long-term care insurance amid rising rates.") When should you buy coverage, or at least start researching it? Slome says start when you're 55.

One reason long-term care insurance gets more expensive when you're older is because you're more likely to develop health problems as you age, says Murray Gordon, founder and CEO of MAGA Ltd., a long-term care insurance agency in the Chicago area. And any medical condition may result in being denied by insurers unwilling to take you on as an underwriting risk.

2. The Medicare/Medicaid question

You should think again if you're counting on health insurance, including Medicare, to take care of you when you need long-term care. Medicare generally doesn't cover it, and Medicaid will pay for a nursing home stay only after you've gone through most of your assets.

3. Go for "short and fat" if you're on a budget

You choose how many years the benefits last and how much you can spend each day when buying a long-term care policy. A "short and fat" policy means the benefits last for a shorter amount of time, but the daily amount that can be used is bigger than "long and thin" protection.

Lisa McAree, a long-term care insurance specialist in Boston, says those without much purchasing-power should consider a larger daily benefit over a shorter period of time. An example: buy a policy with a $200-a-day benefit for three years instead of one with a $100-a-day benefit for six.

Keep in mind that men, average age 65, are expected to need some type of long-term care for 2.2 years; women, also 65, will require 3.7 years of care, according to the National Clearinghouse for Long Term Care Information. You may risk benefits running out with a "short and fat" policy, but you'll keep greater buying power in the early years. You run the risk of not having enough daily benefits for the care you need with a "long and thin" policy.

4. Don't rush in and buy -- do research and find a good agent

Slome and others in the field recognize that long-term care insurance is complicated and can be daunting. Be sure to work with an adviser with experience in the market. Ideally, choose one who sells policies from multiple companies, so that you can compare rates and benefits, which is crucial in making a decision.

"If they don't have enough experience or don't answer your questions adequately, then move on to one who does," Slome says.

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