A comprehensive approach to analyzing your client's long-term care costs - Part Three

If you haven't read the first two parts of this blog, please do so before reading this final installment.


How do you know if you have properly prepared your client for the contingency of future long-term care costs? 

The best way to answer this is to answer the more general, more important question:  Is your client satisfied with the chances that your retirement goals will be reached (including the all-important goal of not outliving your assets), taking into account his/her range of future costs of long-term care? 

To answer this question, it is necessary to combine the desired goals, with the range of costs of long-term care and with the following strategies and balance sheet items:

1. Spending strategy.  What is your client's planned spending for living expenses, vacations, new cars, etc.?  Include medical costs and prescription drug costs (Jack P Paul Actuary, LLC can assist in planning for these two items).
2. Investment strategy.  This includes, but isn't limited to the composition of the client's initial investment portfolio, the anticipated reinvestment/disinvestment of cash flows, the mix of qualified vs. non-qualified assets, and rebalancing strategies.
3. Insurance strategies.  Should there be a purchase of long-term care insurance?  Perhaps an annuity with a long-term care rider?  What about prescription drug plans?  Longevity annuities?  (Again, Jack P Paul Actuary, LLC can assist in determining appropriate insurance strategies).
4. Long-term care Plan of care strategy.  This was discussed in Part One of this blog.
5. Tax strategies.  When to take certain income, deductions, capital gains/losses are active decisions that should be incorporated into this analysis.  Other tax strategies are embedded in the investment strategy, such as when to use qualified vs. non-qualified assets and the tax implications of using one mutual fund vs another.
6. Existing and Future income.  Including earned income and income not included in the investment strategy.  This often includes decisions as to when to start taking Social Security Income.  (Again, Jack P Paul Actuary, LLC can assist in determining the optimum time/age to receive social security income).
7. Existing and future liabilities.  This includes credit card balances, house and car payments and other items.  Care should be taken to determine the time when balances become due and payable (for example, upon a death).
8. Estate and legacy strategies.  This includes leaving money in the will as a goal of the client.

These are all incorporated into programs which perform Monte Carlo testing on the investment rates, mortality and morbidity rates (morbidity includes health care, long-term care, and prescription drug rates of use) and which incorporate the above eight items, to calculate the probabilities that the client will meet his/her goals. 

After these probabilities are computed, iterations are performed and the programs rerun, to determine a set of realistic, achievable strategies that arrive at an acceptably high probability of success of the client goals.  Most often, the most important strategy is the spending strategy, in terms of affecting the probabilities and in terms of the client's future lifestyle.  There is often a tradeoff between the amount of money that the client would like to have available to live on, and the chances of meeting his/her goals. 

In summary, future long-term care costs are an important consideration for those nearing or at retirement.  The methodology presented in this three-part series allows these costs to be planned for in a comprehensive, analytical way, customized to the client.

SPECIAL OFFER FROM JACK P PAUL ACTUARY, LLC

For a limited time, Jack P Paul Actuary, LLC will work with you to produce a comprehensive analysis of a client at 30% off the regular price.
Please contact Jack P Paul Actuary, LLC for details!

This article copyright by Jack P Paul Actuary, LLC 2012

A comprehensive approach to analyzing your client's long-term care costs - Part Two

If you haven't seen Part one of this three part series, please read that before you read this post.

Part Two - How insurance affects the range of long-term care costs:

The second major step in analyzing a client's future long-term care costs is the analysis of how insurance affects the range discussed in Part One of this blog.  Long-term care insurance affects the range of long-term costs in significant ways.  Premiums are payable, which increase the total cost, and eliminate any chance of having zero cost for long-term care for your client.  Of course, the insurance pays for some of the long-term care costs, up to the policy limits.  It is important to note that the policy assumed here is a tax-qualified one, which means that not all long-term costs will be covered by the insurance.  For example, if a policyholder can't perform only one of the Activities of Daily Living, the policy would not pay for long-term care benefits. 

Here is a chart of how the long-term care range of costs displayed in Part One now looks with the purchase of a representative long-term care policy.  The policy has a $200 benefit amount per day maximum payable on a reimbursement basis, a 4 year pool of benefits, a 90 day elimination period and a 5% compound inflation rider.  For comparison purposes, the present value of costs are displayed both with and without the insurance policy:

The probability, on a present value basis,
that the long-term care costs will not
exceed the Specified Amount                      Specified Amount             Specified Amount
                                                                      without insurance              with insurance
10%                                                                $0                                       $24,000
20%                                                                $0                                       $35,000
30%                                                                $0                                       $42,000
40%                                                                $0                                       $47,000
45%                                                                $0                                       $49,000
50%                                                                $0                                       $52,000
55%                                                                $1,000                                $54,000
60%                                                                $4,000                                $56,000
65%                                                                $10,000                              $59,000
70%                                                                $19,000                              $61,000
75%                                                                $34,000                              $65,000
80%                                                                $55,000                              $73,000
85%                                                                $89,000                              $84,000
90%                                                                $141,000                            $103,000
95%                                                                $276,000                            $144,000
98%                                                                $486,000                            $274,000
99.5%                                                             $1,288,000                         $1,053,000

The addition of insurance changes the probability distribution significantly.  Due to the premiums payable, there will always be long-term care costs that need to be paid.  On the other hand, the costs that will be paid under the higher cost scenarios are considerably less with insurance than without.  For example, the amount of assets that must be set aside to ensure that, with 98% probability, that the client's long-term care costs will be covered is $486,000 if the client does not purchase the long-term care policy described above.  That $486,000 reduces to $274,000 if the client purchases the policy, a 44% reduction!

The details behind the chart show that 84.8% of the time, the amount needed to be set aside to cover the client's long-term care costs (in other words, the present value of the client's future long-term care costs) will be less without the insurance.  Also, the "loss ratio" for this policy is computed to be 61%.  That means that, on a present value basis, for every dollar the client gives to the insurance company, 61 cents will be paid out in benefits.  This assumes the client always keeps the policy in force until benefits are exhausted and does not let it lapse.  Some would judge this to be a lot of money - 39 cents on the dollar - to spend for the protection.  The next paragraph is my argument for why long-term care insurance gives effective protection.

One of the strongest arguments for the purchase of long-term care insurance is as follows:  The client can choose to purchase or not purchase insurance.  If the client purchases insurance, there is an 84.8% chance that he/she will pay more than if he/she hadn't purchased it, and a 15.2% chance that he/she will pay less.  However, the amount that he/she will overpay if insurance isn't purchased could be more than $232,000 on a present value basis.  The amount that he/she will overpay if the insurance is purchased is considerably less - up to only $70,000 on a present value basis.  This is what insurance should do - protect against large losses.  Long-term care insurance does this effectively in many cases. 

This information is derived from performing stochastic testing on long-term care liabilities and associated insurance.  Stochastic testing can be used to analyze a wide range of policies and features from different carriers.  Differing elimination and benefit periods, maximum benefit amounts, inflation riders and many other policy features can be examined.   Stochastic testing provides information to the client that is not available using any other method.  Similar testing can be done for annuities with a long-term care rider.  The range of costs vary significantly by issue age, mortality and morbidity profiles and plans of care and other considerations.  When performing stochastic testing it is best to use customized information for the case under consideration.

By using stochastic testing, a client's range of long-term care costs both with and without various insurance alternatives can be examined.  The major question remains to complete the comprehensive analysis:  How do you know if you have properly prepared for the contingency of future long-term care costs?  The answer is in part three of this series, which is the next blog. 


This article copyright by Jack P Paul, Actuary, LLC 2012

A comprehensive approach to analyzing your client's long-term care costs

Here is the first of a three-part series.  Here I explain a comprehensive approach to analyzing and providing an effective way to plan for your client's possible future long-term care costs.  This approach will allow you and your client to see the true risk of possible future long-term care costs, to see how the risk can affect your client's total financial picture, and how to best address the risk, through spending and insurance strategies.  Note that the client could be either a single person or a couple.

PART ONE: THE RANGE OF POSSIBLE FUTURE LONG-TERM CARE COSTS

The first major step is the analysis of how much your client will spend on long-term care costs.  This is not answerable as a fixed number.  The best that can be done is a probability distribution of your client's future long-term care costs.  A probability distribution, as used here, is a chart that states the chances that the future long-term care costs will not exceed different amounts.  The costs could be either the present value of future costs, or the total dollar amount of future costs.

Here is an example of what the chart could look like.  This chart expresses the costs on a present value basis.  One way to think about this present value basis is to consider the numbers in the chart as the amount of assets that should be set aside to fund future long-term care costs.  It is important to note that this is just a sample chart for illustration purposes only - the numbers do not apply to any specific person, although this chart does suggest the general shape of the distribution.

The probability, on a present value basis,
that the long-term care costs will not exceed
 the Specified Amount                                                                      Specified Amount
50%                                                                                                    $0
55%                                                                                                    $1,000
60%                                                                                                    $4,000
65%                                                                                                    $10,000
70%                                                                                                    $19,000
75%                                                                                                    $34,000
80%                                                                                                    $55,000
85%                                                                                                    $89,000
90%                                                                                                    $141,000     
95%                                                                                                    $276,000
98%                                                                                                    $486,000
99.5%                                                                                                 $1,288,000

This chart shows that there is an over 50% chance that no long-term care costs will be incurred. It shows that there is an 80% chance that the costs will be $55,000 or less on a present value basis. It shows that, most of the time, the costs will be managable.  However, there is a chance that the costs will be very high. 

This chart allows the client to understand just what the potential risks are.  This chart is used as the cornerstone of the client's plan to manage long-term care costs.  Note that the chart is before any insurance or other solution is applied.   

Another chart, if the client would understand it better, is the range of total dollar costs that could be incurred.  That chart would display higher numbers on the right hand side of the chart, as there would be no discounting for interest.

In constructing this chart for your client, it is critical that it be based on the client's actual mortality and morbidity profiles.  The mortality measures the probability that the client will live to various ages (yes, the future long-term care costs are very dependent on how long the client may live).  The morbidity measures the health of the client with respect to needing future long-term care.  The better morbidity the client has, the lower the chance of needing long-term care, all other things being equal.  The morbidity and mortality profiles are determined by analyzing questionnaires that the client (with the help of the financial planner) fills out.  Note that these profiles are very useful to understand the client, over and above their use in a long-term care analysis.  The client probably would be happy to know this information. 

The chart is also dependent on the level of care desired.  Does the client have a nursing home in mind - perhaps one near where the residence is - that has a good reputation, or that the client knows someone else who was in that nursing home?  Would the client need a private room in a nursing home, or would be satisfied with a semi-private room?  Does the client wish to remain at the residence and use full time home help, no matter what the client's needs are?  A questionnaire can be filled out to address these issues; perhaps a visit, if desired, with a social worker or long-term care expert would help the client explore the level of care desired.  If desired, national, regional or local average costs of care can be used instead.

The chart is further dependent on the amount of unpaid help the client can receive.  Is the other member of the couple, if any, able to help provide care if needed?  For how many weeks/months/years?  Until the client is how old?  Are there children or other possible unpaid helpers?  It is very important to be realistic here - can the children really be relied on to help?

A technical note -  the chart that expresses future long-term costs on a present value basis is also dependent on the interest rate used to discount the costs.  This rate should be the average earnings rate, net of tax, that the client can expect on the client's portfolio.  The higher the rate the client can expect to earn, the lower the costs in the chart.

END OF PART ONE  - PLEASE PROCEED TO PART TWO


This article copyright by Jack P Paul, Actuary, LLC 2012

 

Straight Talk With Jack: More Do's and Don'ts of analyzing your client's future long-term-care costs!



By Jack P Paul Actuary, LLC



Let me pick up from where my last blog left off.  As I mentioned last time, there are many different approaches to, and pitfalls in analyzing the potential long-term-care costs of clients in their 60's and 70's. Before I get to a comprehensive approach to this topic (but look for one in the next blog - as well as a special offer!), here are some guidelines to consider.



Do: Educate your client about long-term-care.  Make sure your client understands the limited help Medicare provides.  Discuss the problems/limitations in qualifying for Medicaid.  Explain that the level of care in those institutions that accept Medicaid will probably not be at the same level as those that are private pay.  If you don’t have a good knowledge of these issues, by all means use the services of an expert – such as a lawyer who specializes in elder care.


Do: For clients who are couples, analyze both members of the couple.  Besides spousal discounts that can be significant for long-term-care insurance, make sure your clients have an appreciation of what life will be like for the member that doesn’t need care.  Have the couple plan for the case that both members need long-term-care.  What if both members are stricken with Alzheimer’s?  Will their house be put up for sale?   Is there someone to manage their lives?  Will there be conflicts among family members?   For stepfamilies, what additional problems may arise?

Get input from both members of the couple.  They should come to agreement on the necessary issues.  Again, employ an expert if you need to.



Do: Make sure your client’s estate plan is in order.  If not, get them to contact professionals to get it in order.  This includes any medical directives that may be appropriate.



Finally and obviously -



Don't: Ignore your client’s possible range of future long-term care costs.  These costs can run, just for a single person, anywhere from zero to well over a million dollars.  It is very common to focus on the client’s asset portfolio and investment strategies.  A major long-term-care event can “blow up” a financial plan.



Don't: Avoid using help from experts in analyzing long-term-care and its costs.  There is no need to become an expert in long-term-care yourself. 





Next Time: The biggest DO: A comprehensive approach to analyzing your client's long-term care costs! Also, a special offer from Jack P Paul Actuary, LLC!!



About Jack Paul: Jack is President of Jack P Paul Actuary, LLC. He specializes in applying state of the art actuarial techniques to meet the needs of the financial services industry. He has developed a product, PDRP Plus, which calculates probability distributions of future health, long-term care and prescription drug costs for singles/couples near or at retirement. These distributions help financial planners and their clients understand and better plan for these costs, as they are customized to each client's mortality and morbidity profiles. PDRP Plus then, if desired, combines these probability distributions with the client's asset portfolio, and spending, investment, insurance, tax and estate strategies to compute the probability that the client will meet his/her goals, including the all-important goal of not outliving his/her assets.



Jack is a Fellow of the Society of Actuaries, a member of the American Academy of Actuaries, and holds three designations from the American College - Chartered Financial Consultant (ChFC), Chartered Life Underwriter (CLU) and Chartered Advisor for Senior Living (CASL). Jack has over 30 years of experience in the insurance and financial services industries. He is located in Ardmore, Pennsylvania.





Thanks for reading - please e-mail or call me if you have any comments/questions.

Jack@Jackpaulcasl.com

(610)- 649- 2358



Check out my website - www.jackpaulcasl.com



Copyright 2012 by Jack P Paul Actuary, LLC

Straight Talk With Jack: Do's and Don'ts of analyzing your client's future long-term-care costs.

By Jack P Paul Actuary, LLC

There are many different approaches to, and pitfalls in analyzing the potential long-term-care costs of clients in their 60's and 70's.  Before I get to a comprehensive approach to this topic (look for it in the blog dated July 15, 2012 - as well as a special offer!), here are some guidelines to consider.  This blog has specific guidelines; next week's blog will have more general ones.

Don't: Automatically try to sell insurance to everyone who is insurable.  There are many issues, including costs and affordability, the client's willingness to pay premiums for the first several years with little likelihood of benefit payout, the possibility of a premium increase from the insurance carrier, anticipated unpaid help from spouse/family/friends, misunderstandings of what is covered vs. what is not and the client's desire to try to get Medicaid to pay for long-term-care.

Do: Personalize your advice to the client's mortality (chances of living) and morbidity (chances of needing long-term-care) profiles. Can you analyze and make use of the life expectancy of the client? Can you analyze whether your client is insurable for long-term-care insurance, and if so, can you determine whether he/she is preferred/standard/substandard?

This personalization is important, as the client's future range of long-term-care-costs is sensitive to relatively small changes in life expectancy.  Also, a person who has a long life expectancy is more likely to live a long time with Alzheimer's disease, which can be financially crippling.

Related to the previous Do -

Don't: Use general population statistics and sources when discussing with a client the chances that he/she will need long-term-care over the course of his/her lifetime, especially if the statistics/sources are used to induce the client to purchase long-term-care insurance.  The client may be told that he/she has a 60% chance of needing long-term-care, based on one or more general population surveys.   However, those chances include, for example, the chance that the client will need long-term-care for a condition that is not paid for by long-term-care insurance, such as not being able to perform only one Activity of Daily Living ("ADL"), or needing help with paying bills or other Instrumental Activities of Daily Living ("IADLs").  The chance that the client will need long-term-care that is covered by long-term-care insurance is less. 

In addition, the general population has a lower life expectancy than those who are insurable.  This leads to an understatement of the chances of needing long-term-care.  On the other hand, those who are insurable have a better morbidity profile than the general population, which leads to an overstatement of those chances.  The two don't cancel out - the net effect is an overstatement, and the general population has a higher chance of incurring long-term care costs.

Do:  Plan right away for what the client should do in case long-term-care is ever needed. Who will be used by the client should he/she need help with IADLs? What home care providers will be used if the client needs home care? What assisted living facility/nursing home should be used if needed? Suppose the client gets Alzheimer's? Is the client ok with a semi-private room in a nursing home? Would the client rather stay in his/her home if at all possible? The answers to these and many other questions are important in terms of what the range of long-term-care costs look like.

Look realistically at what help, if any, can be obtained from the spouse/family/friends/etc. Can the spouse take care of the client if long-term-care is needed 15 years from now? Can the children really be relied on to help? These issues also affect the range of long-term-care costs.

By carefully considering these questions, realistic ranges of long-term-care costs can be computed and incorporated into a comprehensive financial plan. A questionnaire that logically lists the appropriate questions can be very helpful here.

Don't: Utilize just a single fixed event to analyze a client's range of long-term-care costs.  I have seen cases where a financial planner sets out investment, spending and other strategies so that there is, say, a 95% chance that the client will not run out of money while alive.  To compute this, the planner will assume a rather costly, and rather unlikely, long-term-care scenario, such as a three year nursing home event at age 80.  The planner will also use a high age for the time of death, such as age 96.  The 95% is derived from Monte Carlo (also known as stochastic) testing on the client's asset portfolio.  The problem with this approach, which is done to "make sure" that the client will, with 95% probability, not outlive his or her assets, is that the client's spending allowed under this methodology is a lot less than would be allowed by properly taking into account the full range of long-term-care events and to allow for the full possible range for the age at death. 


Read the Next Blog:  More do's and don'ts of analyzing your client's future long-term care costs!

And then, Keep Reading!:  A comprehensive approach to analyzing your client's long-term care costs! Also, a special offer from Jack P Paul Actuary, LLC!!

About Jack Paul:  Jack is President of Jack P Paul Actuary, LLC.  He specializes in applying state of the art actuarial techniques to meet the needs of the financial services industry.  He has developed a product, PDRP Plus, which calculates probability distributions of future health, long-term care and prescription drug costs for singles/couples near or at retirement.  These distributions help financial planners and their clients understand and better plan for these costs, as they are customized to each client's mortality and morbidity profiles.  PDRP Plus then, if desired, combines these probability distributions with the client's asset portfolio, and spending, investment, insurance, tax and estate strategies to compute the probability that the client will meet his/her goals, including the all-important goal of not outliving his/her assets.

Jack is a Fellow of the Society of Actuaries, a member of the American Academy of Actuaries, and holds three designations from the American College - Chartered Financial Consultant (ChFC), Chartered Life Underwriter (CLU) and Chartered Advisor for Senior Living (CASL).  Jack has over 30 years of experience in the insurance and financial services industries.  He is located in Ardmore, Pennsylvania. 


Thanks for reading - please e-mail or call me if you have any comments/questions.
Jack@Jackpaulcasl.com
(610)- 649- 2358

Check out my website - www.jackpaulcasl.com

Copyright 2012 by Jack P Paul Actuary, LLC