Long-Term Care Insurance Coverage
In Brief: Inflation Protection and Long-Term Care Insurance: Finding the Gold Standard of Adequacy
Research Report
Enid Kassner, AARP Public Policy Institute
August 2002
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Table of Contents: Introduction and Purpose | Key Findings | Conclusions
Introduction and Purpose
This In Brief summarizes the findings of the AARP Public Policy Institute issue paper, Inflation Protection and Long-Term Care Insurance: Finding the Gold Standard of Adequacy.1 The long-term care (LTC) insurance market has grown rapidly over the past decade. Given that many individuals who purchase LTC insurance policies may not access benefits for many years, it is important that insurance benefits keep pace with inflation. To address this issue, AARP commissioned a study to determine whether a policy that includes a 5 percent compound inflation option is adequate to meet the future costs of long-term care.
Key Findings
- About 40 percent of all new buyers of long-term care
insurance policies purchase inflation protection.
- The probability of having a policy with inflation protection
decreases with age: 59 percent of individuals under age 65
purchase inflation protection, whereas only 14 percent of
individuals over age 75 do so.
- The average age at which policyholders access long-term care
services is 82.
- The adequacy of the inflation protection depends in part on
the types of services used. This analysis examined historical
trends in service costs, age at time of purchase, gender, and
state of residence. Using 1999 data on long-term care insurance
policyholders, it was expected that the typical policyholder
would begin to use services between 2015 and 2020. The analysis
found that:
- On average, in a medium inflation scenario2, a policy with 5 percent inflation
protection would cover 74 percent of the daily cost of
nursing home care (at the time that services are first used),
91 percent of daily assisted living costs, and 95 percent of
the costs of a home care visit.
- In terms of the total long-term care liability
over the duration of use, a policy with 5 percent inflation
protection would cover 70 percent of nursing home costs, 82
percent of assisted living costs, and 90 percent of home care
costs.
- Self-insuring for the inflation risk (for example, by investing money for future long-term care needs rather than purchasing insurance) or purchasing a more modest compounding level (e.g., 3 percent annually) makes sense only for older purchasers (age 70 and over).
- On average, in a medium inflation scenario2, a policy with 5 percent inflation
protection would cover 74 percent of the daily cost of
nursing home care (at the time that services are first used),
91 percent of daily assisted living costs, and 95 percent of
the costs of a home care visit.
Conclusions
Given the historical trends in long-term care costs, the insurance policy designs that individuals purchase, and the projected trends in use of institutional and home and community-based care services, a 5 percent compound inflation rider is likely adequate to finance the future long-term care costs of most policyholders: more than 80 percent of the costs of care will be covered by such policies. However, this conclusion depends on the continued shift in service use away from nursing home care and toward assisted living and home and community-based alternatives. Even with inflation protection, those entering nursing homes may bear considerable cost. Those using home and community-based care risk overinsurance. Clearly, the purchase of inflation protection makes the most sense for young buyers. Even in periods characterized by modest rates of inflation, 5 percent compound inflation protection is warranted.
Top of PageFootnotes
1 PPI Issue Paper #2002-09 August 2002.
2 Medium inflation was defined as 5.78
percent for nursing homes and 4.37 percent for home care
services.
Written by Enid Kassner, AARP Public Policy Institute
August 2002
©2002 AARP
May be copied only for noncommercial purposes and with
attribution; permission required for all other purposes.
Public Policy Institute, AARP, 601 E Street, NW, Washington, DC
20049
Pub ID: INB54