Most people are familiar with inflation, which refers to decreased purchasing power due to increased prices of goods and services over time.  When the Bureau of Labor Statistics reported the March 2022 inflation rate in the United States at 8.5%, it was difficult to find an American who wasn't feeling the sting!  With respect to financial planning, it's essential to understand the impact inflation can and probably will have in the future, especially in the context of healthcare costs.  

According to PricewaterhouseCoopers, medical costs are expected to rise 6.58% in 2022.  Since healthcare costs continue to increase at a higher rate than almost any other segment of the economy, it's important to understand ways to mitigate the impact of inflation when designing a customized Long-Term Care (LTC) plan.

Built-In Inflation Protection

Since most people recognize inflation can impact their financial planning, we recommend that most LTC solutions include inflation protection as an option.  While it may increase the plan's cost, the future growth of plan benefits can certainly be worth that cost.   Most solutions allow consumers to select the amount of inflation protection they want, usually between 3% and 5% per year.   The second aspect is how the inflation protection grows, either a simple or compounding increase year over year.

Interest Rate-Driven Benefits

LTC plans built on an annuity chassis can use internal cash accumulation to provide pseudo-inflation-protected benefits.  Certain "hybrid" Annuity/LTC solutions maintain a specific ratio of cash value to LTC benefits, so if the annuity grows by 3% the LTC benefits will increase proportionally.  There may be another significant benefit if this solution is funded by exchanging an old annuity with large taxable gains on withdrawals.  There are some caveats, but your clients may be able to turn those taxable gains into TAX-FREE benefits for LTC. 

Future Purchase Options

For those with a "wait and see" attitude, a LTC solution with a Future Purchase Option (FPO) may be an option to consider.   If healthcare costs continue on their current path, a LTC plan with a FPO will allow someone to increase their plan benefit levels over time; and pay for those increased benefits accordingly.   Usually, a FPO is only available with traditional LTC insurance, so it's important to determine if this is the best option for a LTC plan.

Inflation-Adjusted Benefits

Some LTC solutions offer consumers the opportunity to increase their plan benefits over time by linking that increase with the inflation rate, usually measured by the Consumer Price Index (CPI).   This is a good option; however, with healthcare costs increasing faster than the cost of most other goods/services, it's possible that CPI-linked increases may not be enough.

Indexed Inflation Protection

With inflation protection being an expensive component of a LTC plan, solution providers continue to look for innovative ways to offer consumers options.  The "indexed" inflation protection option is relatively new and offers the consumer a way to link an increasing plan benefit with the performance of a market index or the provider's general investment portfolio.   While this option is a less expensive way to mitigate the risk of inflation, there is the possibility that plan benefits won't increase consistently or at a fast enough pace. 

Since Long-Term Care Planning is designed to meet your client's unique and future needs, it's important that they understand why inflation protection options should be considered.

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