Compound Inflation Rider a long-term care (LTC) insurance policy rider that increases benefits by a rate compounded annually.
What exactly is compound inflation?
On each insurance anniversary, for example, a daily benefit of $200.00 will increase by $6/day at 3% simple interest. A $200/day benefit for a 55-year-old applicant will be worth $350/day at the age of 80.
On each insurance anniversary, a daily benefit of $200.00 will increase by $10/day at 5% simple interest. A $200/day benefit with a 5% simple will be worth $450/day at age 80 for a 55-year-old applicant.
Compound inflation is the accumulation of interest on interest.
Compounding interest, also known as the “eighth wonder of the world,” has a snowball effect that increases your benefits at a faster rate than basic interest.
Compound inflation protection will provide a significant difference in benefits over time compared to ordinary inflation protection. Compound inflation is critical for people in their 40s, 50s, and 60s who expect to file a claim in the next 20-30 years.
With 5% compound inflation, a $200/day benefit for a 55-year-old applicant will be worth $677/day at age 80.
With 4% compound inflation, a $200/day payout will be worth $533/day at age 80 for a 55-year-old applicant.
With 3% compound inflation, a $200/day benefit for a 55-year-old applicant will be worth $418/day at age 80.
Compound inflation protection of 3% is the most popular inflation protection choice among long-term care insurance buyers today.
Compound inflation protection is also necessary for LTC insurance policies that provide State LTC Partnership Medicaid asset disregard benefits.
Today, only a few corporations will provide inflation rises based on the CPI index.
Your long-term care insurance payouts will increase in accordance with the annual increase in the Consumer Price Index if you choose the CPI Compound option.
Please keep in mind that the Consumer Price Index (CPI) has averaged around 2.4 percent from 1983 to 2020.
The CPI index does not apply to long-term care or health-care costs.
If at all possible, a buyer would be better off choosing a fixed guaranteed compounded percentage of 3 percent, 4 percent, or 5 percent compound.
Long-term care insurance policies that are hybrids are occasionally issued as Indexed Universal Life LTC insurance policies.
We strongly advise against utilizing IUL policies to plan for long-term care.
Illustrations of credited interest based on original non-Guaranteed Caps and crediting percentages are commonly used to market and sell IUL policies.
The insurance firm maintains the right to alter the policy’s crediting elements.
They’ll do it, believe it or not.
Don’t get a long-term care insurance policy that isn’t guaranteed and provides the insurance company the authority to change the terms and outcomes of your contract at any time.
Purchase only a contract that includes assured inflation protection.
No Inflation Protection or Simply a “Future Purchase Option” or a “Guaranteed Purchase Option”
Many policies either don’t provide inflation protection or give the policyholder the choice to acquire greater coverage at a higher price in the future.
Please don’t mix automatic inflation protection with “Guaranteed Purchase Options,” “Future Purchase Options,” or “CPI Offers.”
These purchase offers are frequently found in long-term care insurance policies provided to employees in group settings.
This lack of automatic inflation protection is a major issue for younger applicants, who make up the majority of employees in group settings.
A chart comparing inflation protection is shown below.
If you’re buying long-term care insurance in your 40s, 50s, or 60s, you can understand why compound inflation is significant.
Purchasing Long Term Care Insurance Inflation Protection
The significance of purchasing long-term care insurance with inflation protection for you cannot be stressed.
Either your plan must address the issue of rising healthcare expenses, or you must accept an ever-increasing amount of co-insurance in the future.
It is critical to understand the distinctions and long-term impacts of each alternative if inflation protection is acquired.
One word of caution: Many employer-sponsored group long-term care insurance policies do not include automatic inflation protection.
Human resources employee benefits consultants frequently use employee worksite marketing to sign up as many employees as possible.
As a result, the enroller’s motive is to provide the lowest feasible price to the employees in order to get as many sign-ups as possible. As a result, a group long-term care policy could be troublesome and, in a sense, “ticking time bombs.”
The majority of employees who join group plans are in their 40s or 50s.
As a result, the lack of an automatic compound inflation rider within a group long-term care insurance is a serious issue, especially given that younger policyholders require this benefit more frequently.
Automatic inflation protection is also missing from the majority of AARP New York Life long-term care insurance now on the market.
Purchase Offers are typically only included by NY Life salespeople, rather than automated inflation.
Many AARP NY Life agents made this decision based on pricing because the AARP NY Life insurance is currently not competitively priced in the marketplace to include automatic inflation protection.
The AARP policy from NYL is typically twice as expensive as comparable policies on the market today.
As a result, we frequently observe the AARP NYL salesperson omitting automatic compound inflation protection merely to increase the number of plans sold.
Get Good Advice on Your Long Term Care Insurance Inflation Protection Choices
The great majority of long-term care insurance mistakes, more than any other benefit, occur around the inflation protection benefit election.
We’re here to answer your questions and walk you through your options so you can make the best decision possible.
Is there a distinction between simple and compound inflation?
You can pick between a “simple” or “compound” rider when purchasing inflation protection in a long-term care insurance policy. A basic inflation rider adjusts your daily long-term care benefit by a predetermined percentage of your original benefit. The compound inflation rider provides more coverage faster than the plain version.
“A 5 percent automatic compound inflation provision must be offered to the consumer at the time of application under a tax-qualified LTC insurance policy,” explains Jodi Anatole, president of Endeavour Consulting LLC in Greenwich, Conn.
The majority of people who buy inflation insurance choose the 3 percent option since it is more cheap. The 5% automatic compound inflation feature provides the most security, but it is also the most expensive of the inflation options. You’ll want to weigh the pros and cons of each option to see what you can afford and what makes the most sense for you.
This is how it goes. Consider a basic inflation rider of 5% with a daily payout of $100. At the policy’s first anniversary date, coverage will increase to $105 per day. For the duration of the policy, your daily benefit will grow by $5 per year.
You’ll get additional coverage each year if you add a compound inflation rider to your policy. Instead of increasing by 5% based on the original daily benefit of $100, the rate will increase by 5% based on the higher amount of coverage at each policy anniversary date. (After the first year, when the benefit is increased to $105, the next rise will be 5% of $105, and so on.)
In long-term care, what is FPO?
A future buy option (also known as a future increase rider) is a provision of long-term disability insurance (LDI) and some life insurance plans that allows policyholders to raise their insurance coverage on a regular basis or as their income grows.
What is the best way to find compound inflation?
Last but not least, simply plug it into the inflation formula and run the numbers. You’ll divide it by the starting date and remove the initial price (A) from the later price (B) (A). The inflation rate % is then calculated by multiplying the figure by 100.
How to Find Inflation Rate Using a Base Year
When you calculate inflation over time, you’re looking for the percentage change from the starting point, which is your base year. To determine the inflation rate, you can choose any year as a base year. The index would likewise be considered 100 if a different year was chosen.
Step 1: Find the CPI of What You Want to Calculate
Choose which commodities or services you wish to examine and the years for which you want to calculate inflation. You can do so by using historical average prices data or gathering CPI data from the Bureau of Labor Statistics.
If you wish to compute using the average price of a good or service, you must first calculate the CPI for each one by selecting a base year and applying the CPI formula:
Let’s imagine you wish to compute the inflation rate of a gallon of milk from January 2020 to January 2021, and your base year is January 2019. If you look up the CPI average data for milk, you’ll notice that the average price for a gallon of milk in January 2020 was $3.253, $3.468 in January 2021, and $2.913 in the base year.
Step 2: Write Down the Information
Once you’ve located the CPI figures, jot them down or make a chart. Make sure you have the CPIs for the starting date, the later date, and the base year for the good or service.
In Excel, how do you compute compound inflation?
You can earn interest on your money when you invest it. Let’s say you put $3,000 in an account with a 10% yearly interest rate compounded annually. You gain $300 ($3,000 x 0.10) in interest after a year on the initial investment (called the principal), making your investment worth $3,300 ($3,000 + $300). You earn interest depending on the gross figure from the previous period for the upcoming period. Because your investment was worth $3,300, you gain $330 ($3,300 x 0.10) two years after you made the initial investment. It is now worth $3,630.
FV = PV(1+r)n, where FV is future value, PV is present value, r is the interest rate per period, and n is the number of compounding periods, is the standard formula for compound interest.
What exactly is a compound benefit increase?
Many people believe that an automatic compound annual percentage rise in benefits is the greatest option for insurance inflation protection. This typically increases the daily benefit by 3% to 5% per year, compounded annually. This is usually the finest sort of inflation rider for folks who are younger and in excellent health.
What is inflation protection with a step rating?
When recommending LTC insurance to your customers, “default” benefits might make the process of choosing plan options easier, but is this always the best option for your client? The great majority of LTCI customers, for example, choose a 90-day waiting period before benefits begin to pay. This option works well as a modest deductible and as a way to coordinate with the way Medicare provides LTC payments.
The 3 percent compound benefit growth option is another popular choice in both traditional and linked Life/LTC sales. Buyers, especially younger buyers, prefer some type of inflation insurance to keep up with potential cost of care rises. In some cases, however, it may be appropriate to examine alternatives to the 3 percent compound.
First, some background information. Several regulations pertaining to LTC Insurance were included in HIPAA when it was passed in 1996, including a requirement that applicants be given a 5% compound inflation choice (even though the inflation rate in 1996 was 3 percent .)
The choice to make an option mandatory was unfortunate because many of the policies that featured an automatic 5% compound inflation option performed poorly for insurance companies, resulting in demands for in-force rate increases. As someone who owns a 5% compound inflation policy, I discovered that my benefit increased so dramatically in comparison to the actual cost of care that I was able to defray some of the in-force premium notices on my and my wife’s personal policies by simply lowering my daily benefit to a level that was more in line with the actual cost of care. Several carriers are addressing in-force rate increases by giving policyholders the choice of keeping their existing premiums while reducing future inflation rises.
Companies responded in a variety of ways when they discovered they were facing pricing issues. First, they imposed exorbitant pricing on 5-percent compound insurance, which deterred sales (even though the plans, by regulation, still had to offer this to consumers.) Second, they began to offer new inflation choices, the most popular of which was a 3 percent compound automatic inflation rise.
Although 3 percent compound coverage is much less expensive for carriers than 5 percent compound coverage, it still doubles potential benefits every 25 years and is a costly policy rider.
Companies have established some alternatives to 3 percent compound coverage in order to offer reduced premium plans.
Understanding these choices can assist an adviser in providing better LTC protection advice while keeping premiums low. A list of some alternatives is provided below, along with illustrations of how premiums and future benefits are affected. (Premiums for a married female are used in all scenarios.)
Option 1: Lowering the rate of inflation: One simple way to save money is to reduce the automatic inflation adjustment from 3% compound to a lower amount. Some carriers give inflation increases as low as 1%. These plans may still be eligible for LTC Partnership protection depending on the state. The impact of a 55-year-old buyer and a 65-year-old buyer selecting a typical LTC plan is examined in the scenario below. Clients can save a large amount of money by going to a cheaper premium, but they may be able to afford a higher initial monthly benefit in both cases. It can be helpful in this method if you know your client’s budget and can change the inflation rate to fit their budget.
Option 2: Limit the number of years of growth: Some plans will grow at a compound rate, but the number of years of inflation will be limited. One carrier, for example, provides plans that only inflate for ten, fifteen, or twenty years.
The impact of capping inflation for 20 years can be shown in the example below using a linked life/ltc plan.
For younger buyers under 55, keeping the “uncapped” inflation benefit, lowering the initial benefit amount, and letting compound interest work its magic may make sense.
The capped benefit may be more suited for the 65-year-old buyer, however, because to the premium savings. Note that with linked life/ltc plans, the cash value improves for a younger customer, with money available for LTC payouts.
Option 3: Medical CPI Rise: One linked life/ltc carrier offers a plan that adjusts benefits according on the amount of the Medical CPI increase. The plan includes a zero percent increase floor and a maximum yearly increase cap of 6%. A different methodology assures that the policyholder receives a compound adjustment of at least 2%.
Clients and advisers concerned about high medical inflation can acquire the rider for the same premium as a 3% compound – with a strong upside against inflation in the example below.
Here are a number of other inflation alternatives that have been utilized on products in addition to these:
Step-Rated: A step-rated option will increase benefits at a predetermined pace, such as 3% compound for life, but will also raise premiums at a 3% compound or ever-increasing rate. Some plans will keep both premium and benefit increases at the same level. This allows a person to buy a plan at a lower beginning cost while still having some influence over how their benefits and premiums rise.
Simple Inflation Coverage: Simple inflation just increases the value of the initial benefit if it is not met. Some life/ltc companies provide simple inflation coverage, which normally increases by 3% or 5% each year. For someone 20-25 years away from needing care, a 5% simple inflation choice is often equivalent to a 3% compound option.
So, what’s next? Consider other inflation protection choices the next time you’re examining graphics and need to meet a target premium for a customer. The power of your inflation protection option for the normal claim age may be shown in the majority of illustrations, which feature charts to indicate how the benefits will develop. In most circumstances, 3% compound inflation protection be suffice, but we enjoy the variety and innovation offered by LTC Insurance.