The biggest mistake made when shopping for long-term care insurance: confusing the two types of Inflation Benefit

Year Growth in Daily
Benefit
Growth in
Policy
Limit
Type 1:
Company Q
(rated A++)
Premium:
Type 2:
Company Z
(rated A++)
Premium:
1 $170 $372,300 $2,087 $1,655
5 $207 $453,002 $2,087 $2,011
10 $264 $578,160 $2,087 $2,567
15 $337 $738,030 $2,087 $3,276
20 $431 $945,094 $2,087 $4,182
25 $552 $1,208,880 $2,087 $5,337

KEY QUESTION TO ASK about any long-term care policy you’re considering:

As the benefits increase each year,
will the premium also go up each year?

The biggest (and most costly) mistake I’ve seen people make when shopping for long-term care insurance is confusing the two types of Inflation Benefit.

The Inflation Benefit is how your policy’s benefits will grow to try to keep pace with the increasing cost of care.

There are two types of Inflation Benefit:

  1. Type One:  The increases in the benefits each year do not make the premium go up each year.
  2. Type Two:  As the benefits in the policy increase, your premium also increases.

The two types of Inflation Benefit are often confused because the wording in the brochures can be very similar.


Here is an example of language that is sometimes used to describe “Type 1”:

“Your Daily Benefit will automatically increase by 5% compound every year.”

Here is language that is sometimes used to describe “Type 2”:

“Every year you will be offered the opportunity to buy additional coverage.  Your Daily Benefit will increase by 5% compounded annually.”

Recently, I was helping a couple shop for long-term care insurance.  They were given a quote for a policy by an agent from whom they had purchased their life insurance.

The only difference between my quote and their life insurance agent’s quote was the Inflation Benefit.  Their life insurance agent quoted them a long-term care policy that had a Type 2 Inflation Benefit.  That meant that every year their premium would go up by about 5%, unless they chose to not have their benefits grow.

My quote, on the other hand, had a Type 1 Inflation Benefit.  The 5% increases in the benefits each year would not make the premium go up each year.

They’d assumed that their life insurance agent had found them the best deal because the quote was lower.  It wasn’t until they calculated the premium increases into the future that they realized they’d be better off with the policy that had the Type 1 Inflation Benefit.


Here’s how the policies differed in terms of cost now, and down the road:

Year Growth in Daily
Benefit
Growth in
Policy
Limit
Type 1:
Company Q
(rated A++)
Premium:
Type 2:
Company Z
(rated A++)
Premium:
1 $170 $372,300 $2,087 $1,655
5 $207 $453,002 $2,087 $2,011
10 $264 $578,160 $2,087 $2,567
15 $337 $738,030 $2,087 $3,276
20 $431 $945,094 $2,087 $4,182
25 $552 $1,208,880 $2,087 $5,337
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About Scott A. Olson

Scott A. Olson, is the author of “The Guidebook for Making Long-Term Care Insurance Easier.” He is a licensed insurance agent and has specialized in long-term care insurance since 1995. He is licensed to sell long-term care insurance in over 40 states. Scott was born and raised in New Jersey and attended Rutgers University. Scott was a caregiver for a close relative for two years. That personal experience has made him acutely aware of how to help his clients design and choose a long-term care policy that will benefit them when they need it the most. Scott and his wife Carolyn live in Redlands, California. Scott and Carolyn have four sons.