The LTCI Inflation Debate by David Wolf

The LTCI Inflation Debate 3% vs. 5% Compound Inflation Protection The inflation protection option you choose when purchasing a Long-Term Care Insurance (LTCI) policy is the most important component of your purchase. For the average-aged buyer (age 57), the inflation protection is the bulk of the policy’s value. (It is not the policy’s daily benefit at the time of purchase that is of most significance. Rather, it is the future inflated daily benefit when the policyholder is 80-90+ that is critical, since the odds of using the policy for physical or cognitive frailty is exponentially greater in older age.) Your inflation choice is worthy of thoughtful consideration due to the magnitude of its impact on your purchase’s future value.

Deciding which inflationary guard to choose with your Long-Term Care Insurance policy design can be confusing. Today’s policies have many inflationary choices. However, the most common are 3% and 5% compound (level premium) inflation. (NOTE: Some carriers also offer choices based on the national CPI [Consumer Price Index] as an alternative to a 3% compound inflation option. Historically the CPI has averaged approximately 3% [1982-2014].) In order to understand the impact of these inflationary guards, one should understand inflationary trends in the context of an evolving Long-Term Caregiving industry.

Evolution of the Long-Term Care Insurance Industry Long-Term Care Insurance emerged following the implementation of Medicare in 1966... Medicare was designed to cover outpatient physician services and inpatient hospitalization but was never designed to cover Long-Term Care services. (Note: Medicare does have a short-term acute recovery benefit for Skilled Nursing Facilities [Nursing Homes] limited to 100 days.) Insurance carriers recognized the short-fall of this benefit for those needing long-term nursing home care. As a result, the first nursing home policies were created to fill this gap (1974). For the first several decades, most policies were predominantly for Skilled Nursing Facility (Nursing Home) coverage. However, policies gradually evolved and became less restrictive in response to a changing care delivery system. Assisted Living had emerged, and Home Care expanded as an alternative to Nursing Homes. By the 1990s, in response to consumer demand, the LTCI industry introduced its first Comprehensive LongTerm Care policies. These new policies covered Home Care, Assisted Living, Memory Care, and Adult Day Care in addition to Nursing Homes. In the last two decades, we have shifted away from a nursing homebased care delivery system to one dominated by home and community-based care.

Facility-Based LTC Inflationary Trends The 5% compound inflationary guard became the LTCI industry’s early standard offering. This inflationary guard, on average, has historically tracked the best with inflationary trends in facility-based Long-Term Care services (Nursing Homes, Assisted Living Facilities, and Memory Care Facilities). This trend has continued to the present, as facilitybased care is still an integral part of our care delivery system. As a general rule, singles

and widows/widowers may need facilitybased care (i.e. Assisted Living or Memory Care) earlier than couples, as there may be less family support available to keep them at home. (Note: All “Traditional” Long-Term Care policies are required to offer 5% compound inflation as one of the inflationary choices.)

Home Care Inflationary Trends Home Care has expanded dramatically in the last several decades to become the most dominant form of Long-Term Care. It is important to understand some of the dynamics that have affected Home Care inflation as these inflationary trends have differed from facility-based inflationary trends. Home Care is very labor-based. As a result, if wages are not rising significantly, neither are Home Care costs. Following the financial crisis of 2008, these inflationary trends have been nearly flat. To a certain extent, Home Care inflation has risen in line with general inflation. As a result, many in the Long-Term Care Insurance industry argue for a 3% compound guard, pointing to inflation in the general economy averaging near the same for many decades. Since Long-Term Care has dramatically shifted toward Home Care, there is some validity to this argument. However, some contend these labor trends might not persist. Others believe that a higher inflationary guard may be more appropriate, as not everyone will be able to receive care at home, but instead need facility care.

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Long-Term Care Partnership Programs and Inflation Requirements The majority of states currently offer a program rewarding LTCI purchasers for their proactive planning. In these states, LTCI policy owners no longer have to spend down assets to state impoverishment levels (if they exhaust their benefits) in order to qualify for Medicaid - the LTC funding source for financially impoverished individuals (see article: LTCI and Its Partnership with Medicaid). One of the qualifying criteria for a policy to participate in these State Partnership Programs is the purchase of a minimum inflationary guard. These minimum inflation

requirements differ from state to state and are based on the individualâ&#x20AC;&#x2122;s age at the time of purchase. Partnership certificates are issued by the state at the time of purchase. (The majority of states offer reciprocity and will honor partnership certificates issued by other states.) Care should be exercised to ensure that your inflation choice will qualify you to participate in your State Partnership Program

Advice for Discerning Consumers In summary, we advise that you compare Level-Premium options at 3% and 5% compound. Once you have made your selection of an LTCI insurer, compare what you can purchase for the same premium dollar with these two inflation guards. The inevitable choice will be to buy an initially higher daily/monthly benefit with a 3% compound inflation protection, or to buy the lower daily/monthly at a 5% compound. If the growth of these benefits is charted, they will eventually cross at a certain age. Once this age is determined, it can give insight into which inflation guard is a better purchase for that individual. For example, if a 57-year-old purchaser buys a $150/day benefit at 5% compound for the

same price as a $250/day benefit at 3% compound, the benefit will be equal at some age in the future. If this age was 85, the purchaser would have been better off to buy the higher daily benefit at 3% compound if the individual needs to use the benefits prior to age 85. Conversely, if the Long-Term Care need arose after age 85, the purchaser would have been better off to buy the 5% compound inflation guard at the lower daily benefit for the same premium dollars.

Bet on Longevity Health, longevity and family history all play a role in assessing which of these inflationary choices is best for you. Keep in mind the risk of needing this policy increases with age. If an individual lives past the age of 85, utilization rates exponentially increase due to age-related physical or cognitive frailty. Frequently, it is best to choose the option that will create the highest benefit at older ages. When in doubt, medical history in the last 100 years has taught us to bet on longevity. Unfortunately, with longevity comes frailty.