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