Since many people purchase long-term care insurance 10, 20 or 30 years before receiving benefits, inflation protection is an important option to consider. Indexing to inflation allows the daily benefit you choose to keep up with the rising cost of care.
You can increase your benefit by a given percent (5 percent is often recommended) with either compound or simple inflation protection. If you're under age 70 when you buy long-term care insurance, it's probably better to have automatic "compound" inflation protection. This means that the amount of your daily benefit increase will be based on the higher amount of coverage at each anniversary date of the policy. "Simple" inflation protection increases your daily benefit by a fixed percentage of the original benefit amount. Typically, the simple option won't keep pace with the price of services.
In lieu of automatic increases, some policies offer "future-purchase options" or "guaranteed-purchase options." These policies often start out with more limited coverage and a corresponding lower premium. At a later, designated time, you have the option of increasing your coverage — albeit at a substantially increased premium.
If you turn down the option several times, you may lose the ability to increase the benefit in the future. Without increasing your coverage this option may leave you with a policy that covers only a fraction of your cost of care. The younger you are when you buy long-term care insurance, the more important it is to buy a policy with inflation protection.
Premium increases and policy cancellations
Companies can't single you out for a rate increase. However, they can increase rates on a class of similar policies in your state. Most premiums do increase over the life of the policy. The National Association of State Insurance Commissioners has established rate-setting standards and about half of the states, along with several of the large insurance companies, have adopted these measures.
Long-term care policies are "guaranteed renewable," which means that they cannot be canceled or terminated because of the policyholder's age, physical condition or mental health. This guarantee ensures that your policy won't expire unless you've used up your benefits or haven't made your premium payments.
Problems paying the premiums
If you stop paying your premium or drop your benefit, a "nonforfeiture option" will allow you to receive a reduced amount of benefit based on the amount of money you've already paid. Some states require policies to offer nonforfeiture benefits, including benefit options with different premiums.
Since nonforfeiture provisions vary by location, check with your state's insurance department or your state's listing at the National State Health Insurance Assistance Program (SHIP)before dropping your policy. If your policy doesn't have a nonforfeiture option and you stop paying the premiums, you'll lose all the benefits for which you have paid.
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