Insurance Inflation Protection

What Is Insurance Inflation Protection?

Insurance inflation protection is an insurance policy feature in which the value of benefits increases by a pre-defined percentage at specific time periods to keep up with inflation. Insurance inflation protection is designed to allow policyholders to make sure that the benefits they receive can keep up with general price levels, often linked to the CPI.

How Insurance Inflation Protection Works

Individuals are most likely going to look for insurance inflation protection options when shopping for long-term care insurance. Long-term care (LTC) insurance is typically purchased years before benefits are drawn upon, but the future costs of medical care twenty or thirty years from today may greatly exceed the policy benefit. Inflation protection is designed to limit the negative effects of more expensive medical care in the future.

Inflation protection is considered a desirable feature of a policy by policyholders, but it can cause headaches for insurance companies. This is because insurers can face limits to the changes in premiums they can charge individuals. In order to entice policyholders to accept a lower rate of insurance inflation protection, it may offer lower increases in premium costs.

Inflation protection is an additional feature that can be added to the policy, meaning that it is an additional cost that can increase the premium payment. Individuals purchasing a policy may be afforded the ability to choose different inflation rate options, with the different inflation rate options resulting in different premium amounts. Lower inflation rate protection plans will have lower premiums than higher inflation rate options.

Having inflation protection does not mean that the policyholder will never face increases in premiums. Options that allow the benefit to compound at a specific rate each year may be more expensive than options that allow benefits to increase less frequently or at a smaller rate. Regulations may prevent premiums in some policies from increasing with age, but if the insurance company finds that the premium paid is inadequate it may ask regulators for an exception under certain circumstances. 

Options for Insurance Inflation Protection

There are several ways to achieve insurance inflation protection in long-term care insurance policies. The first and best option is to purchase as much daily benefit as possible. Especially for older individuals, this may be more cost-efficient than a specific inflation protection rider.

The second way is the guarantee purchase option (GPO) provision. With this type of rider, a policyholder can increase the daily benefit every two or three years with no additional underwriting. However, at a policyholder's attained age, it will be more expensive. Also, if you've rejected this offer in the past, an insurance company may consider a policyholder ineligible for this rider.

The third method is simple inflation. This protection is usually included in the cost of the premium. Premiums for such policies will often be 40% to 60% higher than those without this rider. This rider increases the daily benefit by 5% automatically every year.

Many consider the best option for insurance inflation protection to be an automatic compound annual percentage increase in benefits. This typically adds 3% to 5% to the daily benefit, compounded annually. For those individuals at a younger age and in good health, this is usually the best type of inflation rider.