Insurance Inflation Protection

What is 'Insurance Inflation Protection'

An insurance policy feature in which the value of benefits increases by a pre-defined percentage at specific time periods. Insurance inflation protection is designed to allow policyholders to make sure that the benefits they receive can keep up with the inflation rate.

BREAKING DOWN 'Insurance Inflation Protection'

Individuals are most likely going to look for inflation protection options when shopping for long-term care insurance. Long-term care 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 can cause headaches for insurance companies. This is because insurers can face limits to the changes in premiums it 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 by 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.