Understanding and Calculating Benefit Increase Options If you are under age 75, it may be in your best interest to have a benefit increase option (BIO). You need to consider compound over simple for more pure protection. The difference between simple and compound is simple creates an equal dollar increase: for example $100 x 5% simple equals a $5 increment; in twenty years the benefit doubles to $200. A 5% compounding benefit would double in fourteen years.

The closer you are to age 73 simple with a higher daily benefit may be more prudent, however, not in all cases. Someone over 75 may find it better suited to use a higher daily benefit amount.

The best way to determine future cost is to calculate the cost of care today in your area and add five percent (5%) compounded over a specific number of years. The average age of an assisted living resident is 84. (National average cost per day as of September 1998 is $120 a day).

• Ages 60-65, use twenty years (multiplication factor 2.6532)
• Ages 66-68, use eighteen years (multiplication factor 2.4068)
• Ages 68-70, use fifteen years (multiplication factor 2.0789)
• Ages 71-72, use thirteen years (multiplication factor 1.8856)
• Ages 73-74, use ten years (multiplication factor 1.6789)
• Ages 75-77, use seven years (multiplication factor 1.4071)
• Ages 78-81, use five years (multiplication factor 1.2762)
• Ages 82-85, use three years (multiplication factor 1.1576)

Let’s begin with an average cost per day of $120 a day and assume you are 73:

$120 a day x 1.6789 (10 years) = $201.47. This is what the estimated daily rate will be in ten years. So if you’re trying to be close to insuring the full amount here’s what you should consider in this example.

$130 a day Simple vs. $120 day Compound; 4 year policy with a 60-day elimination.

5% Compound = $3804 (Policy daily benefit value in 10 years = $201.47)

5% Simple = $3692 (Policy daily benefit value in 10 years = $195.00)

For the $112.00 difference compound may be a better value in the long run.

You should keep in mind your income. If the policy you purchase will cover at least ¾ of the cost at any time you need care, you have done an excellent job in preserving your estate.

Use the same formula when considering someone aged 79. $120 x 1.2762 (5 years) = $153.14. In most cases this individual would not need an inflation rider. If he bought $120 a day his income could handle $900 a monthly expenditure.

5% Compound: