Most long-term care insurance purchasers younger than age 70 should make sure their policy has a 5 percent compound inflation rider, according to a recent AARP Public Policy Institute study.
Because many individuals purchasing long-term care insurance policies may not need the coverage for many years, it is important that insurance benefits keep pace with inflation. But how much inflation protection is enough? To answer this question, AARP commissioned a study to determine whether a policy with a 5 percent compound inflation option, which the National Association of Insurance Commissioners recommends, is adequate to meet future long-term care costs.
The study, Inflation Protection and Long-Term Care Insurance: Finding the Gold Standard of Adequacy, found that a policy with a 5 percent inflation protection would cover 70 percent of total nursing home costs, 82 percent of assisted living costs, and 90 percent of home care costs. The AARP researchers consider these figures adequate, although they stress that even with inflation protection of 5 percent, those entering nursing homes may have to assume considerable cost.
The study also emphasizes that its conclusion that a 5 percent inflation rider is adequate depends on the continued shift away from nursing home care and toward assisted living and home and community-based alternatives.
The study notes that for purchasers age 70 and over, it makes sense to self-insure for the inflation risk (for example, by investing money for future long-term care needs rather than purchasing insurance) or to purchase a more modest inflation rider (such as 3 percent annually).
Approximately four million Americans have private insurance covering long-term care services. About 40 percent of all new buyers of these policies purchase inflation protection, with younger buyers more likely to choose this option. The study found that the average age at which policyholders use long-term care insurance is 82, with men beginning to use it at an earlier age.
For a summary of the AARP study and to download it in PDF format, go to: http://research.aarp.org/health/inb54_inflation.html