In terms of indexing, what happens when the inflation rate exceeds the maximum annual indexing?

When inflation exceeds the maximum annual indexing for a policy, the rate of inflation that exceeds this maximum is carried forward to future years. This means that while the maximum indexing limit restricts how much the policy can be adjusted in a given year, the amount by which inflation has exceeded that limit accumulates and can be factored into future indexing calculations.

This approach ensures that policyholders do not lose the potential benefit of higher adjustments due to inflation completely; rather, any excess inflation is added to future calculations. This setup encourages a balance between maintaining the value of the policy benefits in the face of inflation without allowing uncontrolled adjustments that could jeopardize the insurer's financial stability.

In contrast, discontinuing indexing, ignoring the excess, or freezing benefits altogether would not account for the actual economic conditions affecting the policy, which could lead to a decrease in the purchasing power of the benefits provided by the policy over time. Thus, the choice that states the excess inflation is carried forward aligns best with maintaining the integrity of the policy's value in the long run.