Compound Inflation
Quick Description
A compound inflation rider increases Long-Term Care Insurance benefits by a set percentage each year. Because this percentage is compounded, the benefits increase based on the new total. This can help offset increasing care costs.
Full Description
Policies start with an initial amount of benefits. At the end of the year, compound inflation riders increase these benefits to offset the increasing cost of long-term health care services.
Compound inflation riders increase the benefits within a policy by a specific percentage each year. This percentage is usually between 3% and 5% of the total benefits within the policy.
Compound interest adds this percentage to the previous year’s benefits. The new total becomes the current year’s benefits. This process repeats every year.
Compound inflation is sometimes confused with simple inflation. However, simple inflation only adds a percentage to the principal, or initial, amount of benefits within the account.
Compound inflation helps increase benefits faster than simple inflation. It produces a snowball effect.
The best way to differentiate between compound and simple inflation is with an example. The table below shows how compound inflation increases benefits after a certain number of years.
For this example, the monthly benefit is $3,000. Each column of the table below illustrates how compound inflation, simple inflation, and no inflation affect the monthly benefit over time.
3% Compound & Simple Inflation Benefits Overtime
| 3% Compound Inflation | 3% Simple Inflation | No Inflation | |
| Initial Monthly Benefit | $3,000.00 | $3,000.00 | $3,000.00 |
| Monthly Benefits After 5 Years | $3,477.82 | $3,450.00 | $3,000.00 |
| Monthly Benefits After 10 Years | $4,031.75 | $3,900.00 | $3,000.00 |
| Monthly Benefits After 15 Years | $4,673.90 | $4,350.00 | $3,000.00 |
| Monthly Benefits After 20 Years | $5,418.33 | $4,800.00 | $3,000.00 |
5% Compound & Simple Inflation Benefits Overtime
| 5% Compound Inflation | 5% Simple Inflation | No Inflation | |
| Initial Monthly Benefit | $3,000.00 | $3,000.00 | $3,000.00 |
| Monthly Benefits After 5 Years | $3,828.84 | $3,750.00 | $3,000.00 |
| Monthly Benefits After 10 Years | $4,886.68 | $4,500.00 | $3,000.00 |
| Monthly Benefits After 15 Years | $6,236.78 | $5,250.00 | $3,000.00 |
| Monthly Benefits After 20 Years | $7,959.89 | $6,000.00 | $3,000.00 |
The compound inflation formula can also help you calculate how your benefits will grow over time.
A = P(1+R)^T
- A = The final amount of benefits or the answer
- P = The initial benefit amount or the principal. In the table above, this number was $3,000.
- R = The rate of inflation. In the table above, this number was 5%. Be sure to enter this number either as a percentage or a decimal. 5% would look like 0.05 in decimal form.
- T = The amount of time passed in years. In the table above, “T” was 5, 10, 15, and 20 years. Be sure to enter “T” as an exponent. In some calculators, you can do this by clicking the “^” button.