California Life-Only & Accident and Health AgentRelated Benefits and ProductsHard
A client is seeking a long-term care insurance policy that will adjust its benefit amount annually to account for a 5% increase in the cost of living, compounding over time. Which type of inflation protection rider should the agent recommend?
- ASimple Inflation Protection
- BFuture Purchase Option
- CGuaranteed Purchase Option
- DCompound Inflation Protection
Show answer & explanationAnswer & explanation
Correct answer: D. Compound Inflation Protection
Compound inflation protection increases the initial daily benefit amount by a set percentage each year, and each subsequent year's increase is calculated on the new, higher benefit amount. This method best addresses an escalating cost of living over time.
Why the other options are wrong
- A. Simple inflation protection increases the benefit by a set percentage of the *original* benefit amount each year, not compounding.
- B. Future Purchase Option is another term for Guaranteed Purchase Option, allowing future increases without underwriting, not automatic compounding.
- C. Guaranteed Purchase Option allows the policyholder to buy additional coverage without evidence of insurability, not a direct inflation adjustment.
Compound Inflation Protection (LTC)
An optional rider in long-term care insurance that increases the policy's daily benefit amount by a fixed percentage each year, with the increase calculated on the *previously adjusted* benefit amount, providing a compounding effect.
- Offers stronger protection against long-term inflation.
- More expensive than simple inflation protection.
- Crucial for younger policyholders due to longer time horizon.
Memory trick: Compound's growth, inflation's foe!