The 2 most common types of Automatic Inflation Benefits in long term care insurance policies are: 5% Simple and 5% Compound.
The 5% Simple increases the Daily Benefit each year by 5% of the Starting Daily Benefit. The 5% Compound increases the Daily Benefit each year by 5% of the previous year's Daily Benefit. The automatic increase in the Daily Benefit each year does NOT cause the premium to increase. The increases in the Daily Benefit are built into the premium from the very beginning.
There are 2 types of Inflation Benefits that are linked to the CPI: "Optional" and "Automatic".
The most common is "Optional" and it is usually called a "Future Purchase Option".
A Future Purchase Option (F.P.O.) means that you have a limited right to periodically buy more Daily Benefit without having to prove that you're still healthy. With a Future Purchase Option, the Daily Benefit only increases if you accept the Purchase Option when it is offered to you. Purchase Options are offered at pre-determined intervals, typically every two years or every three years. The Future Purchase Option has many different names. It is sometimes called a Guaranteed Purchase Option (GPO), or a Cost of Living Increase (COLI), or an Indexed Inflation Benefit, or a CPI Inflation Benefit.
An "Automatic" CPI Inflation Benefit means that the Daily Benefit will automatically increase each year according to the CPI. The automatic increase in the Daily Benefit each year does NOT cause the premium to increase. The increases in the Daily Benefit are built into the premium from the very beginning.
Which Automatic Inflation Benefit is better: The 5% Compound Automatic Inflation Benefit or the CPI Automatic Inflation Benefit?
I'd get a quote for both. If the premiums are comparable, I'd choose the 5% Compound Automatic Inflation Benefit because I do not expect the CPI to average more than 5% for the foreseeable future.
Scott A. Olson, CLTC