Simple Vs Compound Inflation ?

[gettingstarted]

In designing the same case I asked about non forfeiture I am also debating on the simple vs compound inflation method.

Client is 65 - I ran illustration with 100 daily compounded and then 150 daily simple and 20 years out the 100 compounded is getting close to the 150 simple ($20/day diff) - but the cost of the 100 is $75 cheaper monthly than the 150....

Is there a general rule with age of person to go with compound or simple?

 

[Mr_Ed]

That will vary according to the policy. Some policies charge a lot more for 5% compound than 5% simple. Others don't. It also depends upon the age of the person--because each policy charges a different amount for the 5% compound based upon the age of the applicant.

If someone gives you a general rule about this, they are misinformed. The only way to do it is to run it both ways for each client to see which design gives them the most bang for the buck.

The fact that you are thinking along these lines demonstrates you're putting your client's best interest first. Well done.

In this case, even if the premiums were identical, I think the client would be much better off starting off with $150 of Daily Benefit and the 5% Simple, rather than $100 of Daily Benefit and 5% Compound.

Caveat: if your client was under age 61, then I'd lean towards some kind of compounding in order for the policy to potentially qualify for "asset disregard" under the DRA LTC Partnership programs.

 

[JMO Fan]

Care costs compound (not simply increase), but it depends upon the person's needs and wants. As always, it's a matter of balancing risks - are they willing and able to afford the compound? If they buy simple or no inflation provision, they accept the risk that costs will rise faster than contract inflation.

 

[Mr_Ed]

JMO,

I understand that true inflation is a "compounding" experience.

But the issue here is, if $150 of Daily Benefit with 5% simple is the same premium as $100 of Daily Benefit with 5% compound (and with some policies and age groups it can be), which design is the best?

It takes 26 years for the $100 of Daily Benefit with 5% compounding to catch up in value to the $150 of Daily Benefit with 5% simple.

That means that the insured would have more benefit over the first 26 years if they chose $150db with 5S.

Then the question becomes: when will the insured go on claim?

If the insured goes on claim after year 26, then the 100db with 5C would have been better.

If the insured goes on claim before year 26, then the 150db with 5S would have been better.

In my opinion, the older someone becomes the less important their LTCi policy becomes. Therefore, in this case, for a 65 year old woman, I would recommend she do $150 db with 5S.

 

[yankee466]

Why not consider a carrier that offers 5% compound 2X. You may get a better value and she'll be compounding for the next 14 years, when she is statistically likely to use the policy anyway (if she is 65 now). Its another option that allows it to build faster and keep the costs down.

Just a thought.

 

[gettingstarted]

Thanks.

I ran both later after my post and it came out like this... If I went 150 simple, at the 20 year mark the 100 compounded was getting close to being the same. And the 150 was almost $80 more per month...

In this case, even if the premiums were identical, I think the client would be much better off starting off with $150 of Daily Benefit and the 5% Simple, rather than $100 of Daily Benefit and 5% Compound.

 

[Mr_Ed]

Thanks.

I ran both later after my post and it came out like this... If I went 150 simple, at the 20 year mark the 100 compounded was getting close to being the same. And the 150 was almost $80 more per month...

At 5% simple, it takes 20 years for the $150 to grow to $300.
At 5% compound, after 20 years $100 has grown to $265.



Year 5% Simple 5% Compound
1 $150.00 $100.00
2 $157.50 $105.00
3 $165.00 $110.25
4 $172.50 $115.76
5 $180.00 $121.55
6 $187.50 $127.63
7 $195.00 $134.01
8 $202.50 $140.71
9 $210.00 $147.75
10 $217.50 $155.13
11 $225.00 $162.89
12 $232.50 $171.03
13 $240.00 $179.59
14 $247.50 $188.56
15 $255.00 $197.99
16 $262.50 $207.89
17 $270.00 $218.29
18 $277.50 $229.20
19 $285.00 $240.66
20 $292.50 $252.70
21 $300.00 $265.33
22 $307.50 $278.60
23 $315.00 $292.53
24 $322.50 $307.15
25 $330.00 $322.51
26 $337.50 $338.64
27 $345.00 $355.57
28 $352.50 $373.35
29 $360.00 $392.01
30 $367.50 $411.61
31 $375.00 $432.19
32 $382.50 $453.80
33 $390.00 $476.49
34 $397.50 $500.32
35 $405.00 $525.33





You need to show her a different policy. The one you're quoting is not very competitive.

 

[gettingstarted]

I've got those same numbers in my illustration.

Why do you say it's not competitive - i've not given out the cost,etc...

At 5% simple, it takes 20 years for the $150 to grow to $300.
At 5% compound, after 20 years $100 has grown to $265.



Year 5% Simple 5% Compound
1 $150.00 $100.00
2 $157.50 $105.00
3 $165.00 $110.25
4 $172.50 $115.76
5 $180.00 $121.55
6 $187.50 $127.63
7 $195.00 $134.01
8 $202.50 $140.71
9 $210.00 $147.75
10 $217.50 $155.13
11 $225.00 $162.89
12 $232.50 $171.03
13 $240.00 $179.59
14 $247.50 $188.56
15 $255.00 $197.99
16 $262.50 $207.89
17 $270.00 $218.29
18 $277.50 $229.20
19 $285.00 $240.66
20 $292.50 $252.70
21 $300.00 $265.33
22 $307.50 $278.60
23 $315.00 $292.53
24 $322.50 $307.15
25 $330.00 $322.51
26 $337.50 $338.64
27 $345.00 $355.57
28 $352.50 $373.35
29 $360.00 $392.01
30 $367.50 $411.61
31 $375.00 $432.19
32 $382.50 $453.80
33 $390.00 $476.49
34 $397.50 $500.32
35 $405.00 $525.33





You need to show her a different policy. The one you're quoting is not very competitive.

 

[Mr_Ed]

I've got those same numbers in my illustration.

Why do you say it's not competitive - i've not given out the cost,etc...

ok. what is the cost?

 

[hardwork]

Hello, Gettingstarted are you still there ??

If she were to use your plan,you nor her or her children would never regret having a higher daily benefit!

If she can afford it, give her the higher daily benefit or some else will !!