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