How to Choose an Inflation Rider for Your Long Term Care Policy

An inflation rider is added to your LTC policy to ensure that your coverage and benefits keep up with rising costs. It increases your daily benefit and maximum lifetime benefits by a specific percentage each year. Although it is expensive to add this rider to your LTC policy, it may protect you from being underinsured.

Instructions

Difficulty: Moderately Easy

1. Assess your long-term care needs. Use a long-term care calculator (see Resources below) to determine the projected costs of getting this care and the projected annual increase due to inflation.
2. Review your current long-term care policy or quotes to determine if there is a funding gap between your projected needs and your existing coverage. If your policy is inadequate, you can self-insure for the difference based on your investments and retirement savings, rely on Medicaid if you will qualify or increase your long-term care coverage with an inflation rider.
3. Meet with a financial advisor to review your options. Evaluate the cost and returns of the two types of inflation riders available. Typically, a LTC inflation rider is set at 5 per cent. At this rate, a simple inflation rider will increase each $100 dollars of coverage by $5 each year. It will increase the policy value by this same amount every year thereafter. A compound inflation rider also will increase each $100 dollars of coverage by $5 each year. Unlike the simple inflation rider, however, the 5 per cent increase is applied to an ever-increasing principal. The original policy amount will increase at a compounding rate with each passing year.
4. Determine which inflation rider suits your long-term care needs and financial resources. The compound rider is more expensive option. Make your selection and ask your advisor to add the rider to your policy.

Tips & Warnings

• An inflation rider is less expensive and offers more value to younger buyers.
• Consider the option of simply increasing the daily benefit amount on your policy to a figure that exceeds today’s daily cost of long-term care. Even though this amount will be reduced by inflation over time, the final amount may still be sufficient to provide adequate coverage. This may be a cheaper way to counter the effect of inflation than adding an inflation rider to the policy.
• Pay for your policy by check and make the check payable to the insurance company, not your agent.