Using CPI as basis for long term care policy

We are looking into buying a long term care policy with inflation protection. We looked at a policy that instead of basing the "inflation protection" on a fixed 5%increase, it based the protection on the yearly "consumer price index". We do not know how to compare the CPI to the inflation rate. Is using CPI as the policy's inflation protection a good idea?

Thanks pk

Reply to
pk
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The CPI is the most commonly used measure of inflation in the US. It measures the annual increase in the cost of a predetermined bundle of goods. There are arguments that the CPI is a bit overinflated, but it is still probably the single best measure we have. Furthermore, the CPI is an average of many elements. Some elements are higher than the average and some are lower. Healthcare's inflation rate is currently much higher than the average.

A word to the wise, the inflation protection rider is increasingly beneficial the younger you are (as compared the the 5%). With the 5% method, the annual increase is based on the intial coverage amount and DOES NOT COMPOUND. It goes up by 5% of the original base every year (ie $6 annually on a $120/day benefit). The CPI compounds and therefore grows to a much higher benefit if enough time elapse between purchase and use of the LTC.

Reply to
kastnna

This is not completely true. It is true some policies do not compound, but others do. My policy does compound and is based on the 5%. To answer the OP's question, I think 5% is better than the CPI as a basis. We rarely have higher inflation, and, even if we did for 2-3 years, overall the 5% compounded would put you in a better position in the long run. I would expect health care inflation to exceed the CPI for many years to come as we baby boomers continue to age.

Elizabeth Richardson

Reply to
Elizabeth Richardson

To state the obvious, 5% not compounded is equal to about 3.5% coumpouded at the 20 year mark. So unless you believe inflation will run above that, I agree with Elizabeth that the 5% is the wise choice. JOE

Reply to
joetaxpayer

That's true JOE. I tried to stress to the OP that age is an important factor. If he doesn't use the coverage for 30 years its only 3% average return and at 40 years its only 2.75% However, if the OP is

60, the 5% annual is almost definitely the way to go.

Elizabeth, you are, of course, aslo correct. I forgot that some LTC policies compound at a fixed rate rather than at CPI (some even give you the choice). The OPer didn't give that as an option and I assumed it wasn't. The OP is probably debating because there is a significant premium difference in the two methods. 5% compounded is comparable in premium to the CPI compounded option. 5% simple, annual is cheaper.

Reply to
kastnna

Thanks for everyones input. Our understanding is that the CPI is the total CPI and not just the CPI for a healthcare or other component. The benefit period of the CPI based policy is 5years plus $1million (should we need to go past the past years.)

Thanks pk

Reply to
pk

Thanks for the info. Comparing the two policies we are looking at, there is about a $400 premium difference between the CPI inflation protection ( benifit period 5year plus $1million) and the 5% compunded protection ( benifit period 5years). Our age is 57years old. We are just not sure which way to go to be sure we get the best for our money. If I'm understanding what is being said ( and understanding insurance is not one of my talents!) you are suggesting we go with the

5% compound policy. Is that correct and if so, why?

Thanks pk

Reply to
pk

the best for our

What I am about to ask is inappropriate for some people, but I occasionally wonder if LTC insurance buyers have considered what the premiums would be worth at say, age 80, if invested in a reasonable/conservative manner?

While I recognize that some consumers are risk averse to the point where this doesn't (and shouldn't) matter, my thought is that it is an appropriate financial planning issue.

After all, this is a lot of money that will not be available to respond to other future challenges. As a widely-used financial planning product, LTC insurance is a fairly new development - nobody knows what the world will be like 15 years from now and what we will need money for.

-HW "Skip" Weldon Columbia, SC

Reply to
HW "Skip" Weldon

Its kind of a toss-up. Like Joe and Elizabeth stated, the 5% simple option will most likely have returns that are greater than the CPI method if you exercise your benefits in the next 20 years. After that the CPI may have a slight advantage. Because of your age, you are probably better off using the cheaper 5% simple method. Statistically, if you ever need your LTC benefits it will be in the next 20 - 30 years. The premium increase for CPI is just just not worth it.

Keep in mind that healthcare is inflating at a rate that is much higher than current CPI or a 5% simple annual increase. You may want to over insure your benefit now, knowing that with every passing year you are losing some of the LTCs purchasing power. If you think you need $120/day now, purchase $150/day because in twenty years it may only buy $120 inflation adjusted dollars of healthcare daily.

Reply to
kastnna

The first thought that comes to mind, is what do you do until 80? An LTC contract, will provide benefits immediately, and possibly for a lifetime. If one were to invest the same dollars as a premium for two years, and then NEED the benefits that the LTC contract WOULD have provided, they would be "up the creek".

Not qiute so new, actually been around for many more years than I can quickly calculate. Are you aware that there are LTC contracts available where you can complete the premium payments in 10 years, and be insured for LIFE?

Cal Lester CLU

Reply to
Cal

EXCELLENT advice ! ! ! ! ! ! Cal Lester CLU

Reply to
Cal

I was playing with the AARP LTC quote system recently and the inflation protection option was was most expensive factor in setting premiums. Doubled them when selected. The second most expensive factor is starting age.

Go to AARP website and select "custom quote" under the LTC insurance question. Then there are dozen factors you can experiment with.

Reply to
rick++

I was one who considered investing vs purchasing insurance. I have an approx. $325,000 policy which costs me approx $2000 year, which I purchased at age 56 (husband age 47), has an inflation protection of 5% compounded. This policy covers both me and my husband, either one or both of us, but limits the total payout of $6800 per month. I didn't think investing $2000 per year would get me to this pool of money by the time I expect to need it (and I do expect to need it), and opted to purchase.

Elizabeth Richardson

Reply to
Elizabeth Richardson

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