Which statement BEST distinguishes 3% SIMPLE versus 5% COMPOUND inflation-protection riders on a long-term care insurance policy?

Question

Accepted Answer

A 3% SIMPLE inflation rider increases the daily benefit by 3% of the ORIGINAL benefit each year (linear growth), while a 5% COMPOUND inflation rider increases by 5% of the PRIOR YEAR'S benefit each year (exponential growth); over a 20-30 year horizon, the 5% compound rider produces substantially LARGER benefit growth and is the standard required for California Partnership LTC qualification (under California Insurance Code §10232.9 and Welf. & Inst. Code §22009 et seq.)

Answer

Both simple and compound inflation riders produce identical benefit amounts after 20 years, because the two designs differ only in the timing of the credit: a simple rider adds the whole annual increase on the policy anniversary while a compound rider spreads that same increase across the twelve months, so a 3% simple and a 5% compound rider converge on the same daily benefit once the policy has been in force for two decades, and the premium difference between the two designs reflects nothing more than that timing

Answer

Simple inflation riders generally produce LARGER long-term benefit growth than compound riders, because a simple rider applies its percentage to the original daily benefit and is never reduced by benefits already paid, while a compound rider recalculates each year from the pool of benefits still remaining; over a twenty- to thirty-year horizon the linear increase therefore overtakes the exponential one and costs less in premium

Answer

Simple inflation riders are required by California and compound inflation riders are prohibited, because the Insurance Code treats exponential benefit growth as an unsound reserving practice; an insurer that wants to offer more than a flat annual percentage of the original daily benefit must instead file a rider that is repriced periodically, and California Partnership policies may carry no inflation protection at all

Which statement BEST distinguishes 3% SIMPLE versus 5% COMPOUND inflation-protection riders on a long-term care insurance policy?

Explanation

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