pdrp plus detailed product presentation
DESCRIPTION
A NEW, BREAKTHROUGH PRODUCT FOR FINANCIAL PLANNERS - USING STATE OF THE ART ACTUARIAL TECHNIQUES TO ANSWER THE NUMBER ONE QUESTION ON CLIENT'S (NEARING OR AT RETIREMENT) MINDS - DO I HAVE ENOUGH MONEY TO LAST THE REST OF MY LIFE?TRANSCRIPT
An Actuarial Analysis of Retirement Goals and Risks
A New Tool For Comprehensive Financial Planning Professionals
COPYRIGHT 2009 JACK P PAUL ACTUARY LLC
Probability Distributions for Retirement Planning
PDRP Plus
Developed by
Jack P Paul, FSA, MAAA, CLU, ChFC, CASL
President, Jack P Paul Actuary LLC
101 Mill Creek Road Suite C
Ardmore, PA 19003
610-649-2358
Website: [email protected]
Copyright 2009 Jack P Paul Actuary
This new tool is a Probability Distribution Of Your Client’s Major Unknown Expense Risks Faced at Retirement
Introduction
Long – term Care Costs Prescription Drugs Longevity
Which can be Combined with your Client’s
To Compute the Probabilities of Successfully Meeting the Client’s Goals, including having the Client’s Assets Last For Life.
Asset Portfolio Investment Strategy Living and Other Expenses (Planned Spending)
What can PDRP Plus do for you?
PDRP Plus can help you compute the chance that the client will meet his/her goals more accurately and comprehensively than is currently done by financial planning software.
PDRP Plus increases the knowledge given to your clients. BECAUSE OF THIS: PDRP Plus will allow you to attract more business, as it will give
you an advantage over other financial planners. PDRP Plus can bring in more income per client.
What is Currently Done in Financial Projections To Project the Chances of Meeting Clients’ Goals?
Traditional Financial Projections
Usually, projections are focused on living expenses. These expenses are generally fixed but increase with inflation and future events that are planned for (vacations, purchases, etc.)
The variability of long-term care expenses is ignored. These expenses are sometimes low or nil, but other times can be so large they can prevent a client from reaching his/her goals, or even lead to impoverishment in some cases
When long-term care expenses are brought into play, it is usually in the form of a fixed event, such as projecting, say, a two year stay in a nursing home starting at age 80. The implicit claim is that if the client can afford this nursing home stay, he/she should be able to meet his/her retirement goals; in fact, sometimes the client’s retirement strategies (spending, investment, insurance) are adjusted to meet the client’s goals assuming this long-term care event actually occurs. There is no attempt to figure out the probability of this happening, or to use more likely events occurring, or to incorporate a continuum of events happening with their corresponding probabilities. This can easily lead (as will be shown) to strategy recommendations that “miss the mark”
An evaluation of an insurance purchase is usually done assuming a claim occurs, ignoring the chances of that claim occurring
Expenses:
Traditional Financial Projections (cont)
Time Horizon:
The retirement planning time horizon is usually either: until the life expectancy of the client; or a fixed advanced age (say, age 95 for an age 65 client). This life expectancy of the client is based on general averages, and not on any evaluation of the client’s future mortality possibilities
Note, however, that recently, some software programs now allow a “randomization” of the client’s date of death. This allows the effects of mortality to enter into the computation of the client’s chances of meeting his goals. However, it is not customized to the mortality profile of the client; it is based on general averages
Prescription Drugs:
Prescription drugs, if modeled, are usually modeled based on the current prescription drug use (with inflation) and not on possible future increased use
Prescription drug use can cost a significant amount of money (even with Medicare Part D), and can have a major impact on the client’s goals
Traditional Financial Projections (cont)
Monte Carlo Testing:
Asset “Monte Carlo” testing is often done on the client’s asset portfolio to see if the amount of assets, along with the investment strategy, will allow the client to meet his/her goals
This testing is done with one or two expense scenarios, not with a comprehensive analysis of the client’s long-term care, mortality and prescription drug risks
Traditional Financial Projections (cont)
What are the implications of performing testing this way?
By not correctly analyzing the client’s long-term care, mortality and prescription drug risks, recommendations are made that miscalculate the chance of the client’s success in meeting his/her goals
If that chance is understated, the financial planner often recommends strategies to increase the chance of success. That would possibly unnecessarily require the client to cut back his/her spending in retirement, which would be a disservice to the client
If that chance is overstated, it would lead to some clients failing to have enough money to meet their goals, even though the recommendations of the financial plan were followed
These problems are addressed in this new product!
SMARTER PLANNING:
PDRP Plus
A Probability Distribution of Your Client’s Major Unknown Expense Risks
COPYRIGHT 2009 JACK P PAUL ACTUARY LLC
Long Term Care Costs and Prescription Drug Costs
COPYRIGHT 2009 JACK P PAUL ACTUARY LLC
Sample Chart of Client’s Projected Range of Long-Term Care Costs
Sample 65 year old single male who is insurable at standard rates for long-term care insurance.
He has chosen a plan of long-term care that costs well above the national average, should he need it.
Probability Amount of Assets Set Aside Won’t Exceed:1% 05% 0
10% 015% 020% 025% 030% 035% 040% 045% 3,00050% 5,00055% 11,00060% 19,00065% 30,00070% 42,00075% 58,00080% 80,00085% 114,00090% 160,00095% 238,00099% 462,000
99.50% 534,000
Chart displays the Probabilities that the Future Long-Term Care Costs of the Client Will Be Met By Setting Aside Certain Levels of Assets (displayed before tax)
Here is a sample graphic of the chart in the previous slide. The bottom line (X-axis) shows the chances out of 10,000 that the costs will be at or below the level of the blue line. For instance, for this client, there is, as you can see by the chart in the previous slide, (approximately) a 90% chance that the amount of assets need to provide future long-term costs will be no more than $160,000.
10 410 810 12101610201024102810321036104010441048105210561060106410681072107610801084108810921096100
100000
200000
300000
400000
500000
600000
700000
800000
900000
Series1
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The above chart does not display the total dollar costs that may be spent over the client’s lifetime!
Those costs are higher than the ones in the chart. Those costs ignore the time value of money
For comparison, the following chart displays the probabilities that the total costs do not exceed the amounts shown:
COPYRIGHT 2009 JACK P PAUL ACTUARY LLC
Probability Total Dollar costs won't exceed:1% 05% 0
10% 015% 020% 025% 030% 035% 040% 045% 7,00050% 15,00055% 28,00060% 50,00065% 80,00070% 116,00075% 166,00080% 242,00085% 348,00090% 513,00095% 803,00099% 1,710,000
99.50% 2,006,000
COPYRIGHT 2009 JACK P PAUL ACTUARY LLC
Total dollar costs over the client’s lifetime
What Makes This Information about Long-Term Care Costs Unique?
The long-term care costs for the remaining lifetime of an insurable person can vary very widely, from zero to over a half a million dollars or more (on a present value basis).
Those costs are dependent on many things, including: The medical condition of the person The chances of needing long-term care The length of time long-term care is needed, and the location where services are received The chances of dying The level of comfort and care the person desires, and whether there are unpaid providers
available The rate of earnings of the client’s assets The rate of inflation, and The provisions and features of existing and future long-term care insurance that the person
owns or will own.
No where else are all these factors combined into one analysis to examine the range of costs, and (as you’ll see later) the effect of an insurance purchase on the range of costs.
COPYRIGHT 2009 JACK P PAUL ACTUARY LLC
This Information Is Customized To The ClientCLIENT PROFILE:
Appropriate for singles or couples - currently my product handles those 65 and over; soon the ages will be expanded to 55 and over
My product is currently suitable for insurable individuals; soon uninsurable individuals will be added
PLAN OF CARE:
A plan of care, in which, after discussions between the client and the financial planning professional, will identify the cost of care and the caretakers (i.e., actual home caretakers, assisted living/nursing home facilities, etc.) in the event home care, assisted living or nursing home care is needed. This will include a decision as to whether the spouse or other unpaid person will take care of the client before paid care is needed. Note that average costs can always be substituted if desired for the plan of care. The costs of this plan of care will be incorporated into the projection
COPYRIGHT 2009 JACK P PAUL ACTUARY LLC
This Information Is Customized To The Client (Cont.)
RATES & INSURANCE:
The appropriate rate to use to discount long-term care costs in future years, which depends on the client's comfort level as to the future performance of the client's assets
Various inflation rates chosen in consultation with the client
The appropriate insurance policy to purchase, if any. This will be done through comparison of insurance policies and features within policies to see the effect each one has on the total probability distribution
COPYRIGHT 2009 JACK P PAUL ACTUARY LLC
This Information Is Customized To The Client (Cont.)
MORBIDITY AND MORTALITY ASSESSMENTS A morbidity screener (a questionnaire, with optional telephone interview and attending
physician statements in certain cases) assigns the client to a level of morbidity. The questionnaire is completed and evaluated by either Jack P Paul Actuary LLC or an outside service
A mortality screener (a questionnaire) is used to assign the client to a level of mortality and a mortality table, which gives the average rate of a person dying each year, which is used to compute information for the projections. The questionnaire is completed and (sometimes) sent to an outside firm for evaluation. These mortality rates are expressed either in terms of the Relative Risk tables of the Society of Actuaries (modified by Jack P Paul Actuary LLC), or, in some cases, on general population mortality tables. The mortality levels are different depending on smoking status. A chart of the mortality table, as well as the table itself, are included in the report that is provided. This information is valuable, as it gives the client a perspective from which to view his financial plan
The levels of morbidity and mortality are combined to compute the average time a client can expect to be healthy, needing home care, in an assisted living facility and in a nursing home
This Information Is Customized To The Client (Cont.)
For the sample case above, the client will spend, on average, 20.20 years in a healthy state, .85 years needing home care, .51 years in an assisted living facility and .46 years in a nursing home
Prescription drug use is based on having/obtaining one or more of six chronic conditions, along with the current levels of prescription drug costs. Additional costs are incurred with the chances of getting Alzheimer’s disease. The costs are adjusted if the client has a Medicare Part D type (or other) prescription drug plan
COPYRIGHT 2009 JACK P PAUL ACTUARY LLC
How Long-Term Care Costs are Affected by the Purchase of a Long-Term Care Insurance Policy
ProbabilityAmount of Assets Set Aside Won’t Exceed:
1% 15,0005% 34,000
10% 45,00015% 51,00020% 55,00025% 59,00030% 62,00035% 64,00040% 67,99045% 69,00050% 71,00055% 73,00060% 75,00065% 77,00070% 79,00075% 82,00080% 86,00085% 93,00090% 112,00095% 145,00099% 307,000
99.50% 370,000
The long-term care insurance policy:
Has a four-year benefit period
Has a daily benefit amount of $200/day
Is a comprehensive policy covering both home care (at 100%) as well as facility care
An inflation provision of 5% compound
An annual premium of $4,961 (paid monthly)
COPYRIGHT 2009 JACK P PAUL ACTUARY LLC
Amount of assets set aside will not exceed:
Probability:Without Insurance: With Insurance:
1% 0 15,0005% 0 34,000
10% 0 45,00015% 0 51,00020% 0 55,00025% 0 59,00030% 0 62,00035% 0 64,00040% 0 67,00045% 3,000 69,00050% 5,000 71,00055% 11,000 73,00060% 19,000 75,00065% 30,000 77,00070% 42,000 79,00075% 58,000 82,00080% 80,000 86,00085% 114,000 93,00090% 160,000 112,00095% 238,000 145,00099% 462,000 307,000
99.50% 534,000 370,000
Comparison of Long-Term Care Costs and Purchase of Long-Term Care Policy (cont.)
• As you can see from the chart, the insurance “blunts” the higher costs. For example, there is an 90% chance that the total long-term care costs without insurance will be no more than $160,000. With the insurance, this amount goes down to $112,000
• This “blunting” has a cost of premiums of $4,961 per year. In fact, for 81.14% of the time, the present value of long-term care costs with insurance will be higher than the costs without it. (This calculation will be included in the reports I produce)
• The average percent of premiums paid out in benefits, taking into account this client’s morbidity and mortality profiles and the personalized plan of care was 51.4%. That means that the insurance company kept 48.6% of the premiums for benefits, expenses and profit. (This can be interpreted as the company “loss ratio” – the higher the better for the client)
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Combining the Probability Distribution with the Client’s:Asset Portfolio,Investment Strategy, andExpenses:
Computing the Probabilities of Successfully Meeting the Client’s Goals
COPYRIGHT 2009 JACK P PAUL ACTUARY LLC
The expenses, investment strategies, assets and other aspects of the client’s plan can be combined with the probability distributions computed to measure the probability of success of the client’s goals:
Having assets last throughout life Other goals (vacations, education, leaving a specified inheritance, etc.)
Includes the Client’s Assets lasting throughout life
How Does the Combining Take Place?
Exclusive software created by Jack P Paul Actuary LLC
COPYRIGHT 2009 JACK P PAUL ACTUARY LLC
PDRP Plus
How Does the Combining Take Place? (Cont.) PDRP Plus, to compute the probabilities of successfully meeting the client’s
goals, performs “Monte Carlo” testing on the client’s financial goals. PDRP Plus’s Monte Carlo testing involves simulations of the client’s future
financial and health outcomes. For each simulation, PDRP Plus steps through a possible way the client’s financial situation and health play out, month by month from the client’s current age until death. Some scenarios last for as little as one month; others can last 50 years or more. The simulation’s outcome is dependent on the probabilities of different financial and health outcomes occurring.
A simulation is considered successful for a goal if there is enough money to fund that goal at the proper time. For the goal of having enough money to last the client’s lifetime, the simulation counts that goal as successful if the amount of assets is above a certain client-selected tolerance at death. The number of scenarios that are successful, divided by the number of runs (often 12,500,000) gives the chance that the client will meet his/her goals.
The chances of success are computed by goal.
How Does the Combining Take Place? (Cont.) If the client’s chances for success are too low (as determined by the financial
planner and client):
Investment, insurance, long-term care plans and non-variable spending strategies can be modified and re-projected if any goals are not met; iterations can be performed until the client is satisfied (or the chances of success maximized)
PDRP Plus:
To measure the long-term care and prescription drug expenses, 25,000 random scenarios (Monte Carlo scenarios) are created
These 25,000 scenarios each give year by year expenses (net of insurance, where applicable) from the start age until death
The scenarios vary from each other significantly because:
Death can occur at any time
The need for long-term care can occur at any time
The setting for long term care varies
The amount of prescription drug cost varies
COPYRIGHT 2009 JACK P PAUL ACTUARY LLC
How Does the Combining Take Place? (Cont.)
These runs are combined with the other living expenses of the client. These expenses will increase each year by inflation. These include day-to-day living expenses and other expenses not associated with long-term care and prescription drug expense
Additional expenses are input for other goals the client may have, such as vacation or the purchase of new cars
500 Asset scenarios are created These 500 Asset scenarios are combined with the fixed expenses and the
25,000 liability scenarios, to produce a total of 12,500,000 “tests” of whether the client’s goals will be reached. Each test that reaches the client’s goals is marked successful
The number of the “tests” that are marked successful, divided by 12,500,000, gives the chances that the client will meet his/her goals (as previously stated, the number of scenarios can be changed if desired)
COPYRIGHT 2009 JACK P PAUL ACTUARY LLC
PDRP Plus (cont.):
How Does the Combining Take Place? (cont.)
Asset modeling in PDRP PLUS
PDRP Plus works best when the assets, investment strategy and disinvestment strategy of the client are each categorized into one or more of 12 fixed asset classes:
Money market Intermediate-term bonds Long-term bonds International Government bonds High-yield bonds Commodities Large-cap equity Mid-cap equity Small-cap equity International established equity International emerging equity REITs
Asset modeling in PDRP PLUS (Cont.) For each asset class, means and variances, along with the covariances between
asset classes, are used to project returns on each asset class for the simulations
The information is based on historical data for the asset classes, analyzed using the Capital Asset Pricing Model, and adjusted for future inflation expectations
These returns can be considered “average” returns for the each class in total. Within each class, some assets will perform better than the average and some worse than the average
The planner can input an additional amount to be added to the mean each year, without changing the variances or covariances, to reflect the additional returns that can be provided by the financial planner over and above the average, less the amount of charges by the planner for advice and administration
The planner can also “override” means, to grade from current values into historical values; Other overrides can be made if desired
Assets are also classified by tax-qualified status Additional information is obtained to compute taxes for the various asset
classes.
Other Modeling Considerations in PDRP PLUS Certain assets, such as health savings
account balances, insurance policies, and others are treated separately
Income of the client is incorporated into the projection
Liabilities of the client are incorporated into the projection
Comparison of a Traditional Projection and an Actuarial Analysis
For a given client (described on the next slide), here is a computation of the probabilities for meeting the goal of not running out of money before death.
COPYRIGHT 2009 JACK P PAUL ACTUARY LLC
Actuarial Analysis Traditional Projection
500 asset runs are performed
Each run with 25,000 liability runs
500 asset runs are performed
Each using same liability projection
Comparison of a Traditional Projection and an Actuarial Analysis
CASE STUDY/CLIENT: Age 65 male, single, no dependents
Standard, insurable LTC risk
Measured to have expected future mortality similar to the mortality underlying the RR100 Society of Actuaries Mortality Table (as modified by Jack P Paul Actuary LLC)
Has $400K of assets, all non-qualified
The assets were characterized into the nine asset classes mentioned earlier; only four asset classes were relevant to the client’s portfolio – Money market, Intermediate term bonds, Large Cap stocks and Small Cap stocks
Taxes are paid on the total gains each year, with carryforward of unused losses. All values are tracked at market, so no extra gain or loss occurs at asset sale
Plans to spend down his assets for living expenses at the rate of $1,000 per month in 2010, increasing after that by 3% per year (over and above income)
Goal: That his money will last the rest of the client’s life.
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Comparison of a Traditional Projection and an Actuarial Analysis (cont.)
COPYRIGHT 2009 JACK P PAUL ACTUARY LLC
Actuarial Analysis Traditional Projection
LTC costs based on customized plan of care
Prescription drugs – normalized to client’s current use
Morbidity and mortality profiles used
500 asset runs combined with 25,000 liability runs
Goal is to have assets last for life
Goal is measured by how many of the 12,500,000 runs have assets greater than zero when client dies
500 Asset runs using one set of spending
Done two ways: Assuming client lives to 85; assuming client lives to 95
LTC event: Client will need a two year stay in a nursing home with higher than average cost at age 80 (same cost level as was used in the actuarial analysis), then recover – the LTC scenario was set this way because it was felt that if there is enough money for the client with this scenario, the client will be in a good financial position.
Comparison of a Traditional Projection and an Actuarial Analysis (cont.)
COPYRIGHT 2009 JACK P PAUL ACTUARY LLC
Actuarial Analysis Traditional Projection
Chance of meeting goal: 81%
Chance of meeting goal if living expenses are reduced by 10%: 86%
Chance of meeting goal if living expenses are reduced by 20%: 90%
The major chances of failure are more driven for this client by the high cost of the long-term plan of care chosen, as well as the range of future prescription drug costs, than by the level of living expenses
RESULTS
Chance of meeting goal: 68% if lives to age 85, 51% if lives to 95
Chance of meeting goal if living expenses are reduced by 10%: 78% if lives to age 85, 67% if lives to age 95
Chance of meeting goal if living expenses are reduced by 20%: 85% if lives to age 85, 79% if lives to age 95
Comparison of a Traditional Projection and an Actuarial Analysis (cont.)
COPYRIGHT 2009 JACK P PAUL ACTUARY LLC
Comments
The results of the traditional projection vary from a 51% chance of the client not outliving his money to an 85% chance
Which scenario is appropriate? What are the probabilities that the long-term care scenario will occur? Will the client live to 85? 95? Some other age?
Is recommending a 10% or 20% reduction in spending (along with the implications on the client’s lifestyle) a good idea, considering the scenario chosen may be unlikely? Is it a service to the client to base recommendations on scenarios that have an unknown likelihood of coming true?
Traditional scenarios don’t take into account the variability of prescription drug costs. How will the client’s finances be affected if he gets a series of chronic conditions with associated high prescription drug costs? What is the probability of that happening?
The actuarial analysis solves this problem. There is no need to devise a single or handful of scenarios as a criteria for whether the client’s goals will be met. It computes the chance of success (not outliving his money) taking into account the client’s projected expenses along with the risks of long-term care, prescription drugs and longevity
Comparison of a Traditional Projection and an Actuarial Analysis (cont.)
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Comments (cont)
To increase the chance that the client will meet his goals, the client can:
Make adjustments to his planned investment strategy
Make adjustments to his planned future spending levels
Consider insurance strategies
Consider immediate or longevity annuities
Make adjustments to his customized plan of long-term care
The actuarial analysis evaluates all strategy changes in a comprehensive manner. The results of each test can be compared to each other, expressed as the probability of success
Comparison of a traditional projection and an actuarial analysis (cont.)
COPYRIGHT 2009 JACK P PAUL ACTUARY LLC
The actuarial analysis provides detailed, customized information allowing the financial planner and the client to:
Realistically set and measure the chances of achieving the client’s goals
Adjust the client’s investment, spending and insurance strategies, as well as the proposed plan of long-term care, to maximize the chances of achieving the client’s goals
Summary
PDRP Plus (Actuarial) Analysis vs Traditional Financial Projection
Traditional Projection
# of Asset Runs 500 (can be adjusted) 500 (can be adjusted within limits)
# of Liability Runs 25,000 Under 10
Total Number of Runs 12,500,000 Under 5000
Long Term Care Liabilities Customized Plan of care
Dynamically modeled using probability distribution
An event assumed to occur, oftentimes an expensive and unlikely one
Prescription Drug Costs Based on getting chronic conditions or Alzheimer’s disease
Either ignored or current level of spending used with inflation
Morbidity Dynamically modeled using probability distributionProbability of needing long-term care analyzed based on questionnairePrescription drug use based on the probability of incurring chronic conditions
Ignored
Mortality Mortality rates tied to Society of Actuaries’ or General population mortality tables
Customized, based on questionnaire (in some cases, based on analysis of additional medical information)
Projects varying times of death
Projections run until fixed age; sometimes this age is the "life expectancy" however obtained; sometimes this age is high, such as age 95 for a 65 year old
Not based on mortality profile of client
PDRP Plus
PDRP Plus (Actuarial) Analysis vs Traditional Financial Projection (cont.)
Traditional Projection
Living Expenses Based on information from traditional financial projection
Covered
Taxes Federal taken into account, state estimated
Sometimes comprehensive; sometimes pieces missing (such as deductibility of ltc and drug expense)
Goals Based on information from traditional financial projection
Covered
Investment /Disinvestment Strategies Based on information from traditional financial projection; categorization occurs into 9 asset classes
Covered
Insurance Strategies Long term care, Medicare part D, life insurance all taken into account
All projections are dynamic; the benefits are adjusted to the actual incidence by scenario
Iterations possible to compare various LTC insurance policies
Long term care is modeled for one event; Life insurance is modeled
Probability of Assumptions Used Taken into account Not specified or computed by software
PDRP Plus
PDRP Plus (Actuarial) Analysis vs Traditional Financial Projection (cont.)
Traditional Projection
Asset Information used in Stochastic Asset Testing
Each asset categorized into one or more asset classes. Historical means, variances and covariances used, adjusted for inflationMultivariate normal distribution used to project asset returnsFull override capability depending on client preferences – means, asset class methodology can be overridden
Results can be duplicated; full control over random number generator
Year by year output by scenario is available for close examination
Varies greatly by software provider:Could project just a single asset with a mean and standard deviation;Could project actual assets, but with negative returns artificially set to zero;Could project asset classes, with historical or projected means, variances, covariances;
Results generally vary each time projection run, even with exact same input; no control over random number generator
Year by year output can’t be examined
Setting Strategies Allows insurance, plan of care, spending, annuity and investment strategies to be analyzed based on customized morbidity and mortality profiles of client to determine the chances of meeting goals
Strategies not customized to morbidity or mortality profiles Chances of meeting goals only done on asset side, not on liability side
Cannot accurately measure effects of longevity annuities
PDRP Plus
Step by Step Process to Produce a Client Analysis
COPYRIGHT 2009 JACK P PAUL ACTUARY LLC
For each client of the financial planning professional, the process consists of:
Initial discussion between Jack P Paul Actuary LLC and the financial planner
Questionnaire provided to financial planner
Completion of questionnaire by financial planner, working with client• Should take between one and three hours to complete; some of the information can be
obtained from the prior preparation of a base financial plan
When questionnaire is returned, portions sent to outside firms to produce mortality and morbidity profiles, if necessary
Initial report is prepared by Jack P Paul LLC; this will be approximately two weeks from the receipt of the questionnaire
Initial report is reviewed with financial planner and client; including initial asset/expense projections of client’s goals
Changes are made to report; a series of reruns takes place here to finalize projections; different investment, spending, LTC plan of care, insurance, annuity and other strategies are examined here
A final report is provided
The questionnaire contains the following requests for information:
Basic information about the client and spouse (if applicable) Information about the anticipated plan of care should the client
need it Identification of non-paid worker (such as spouse) if needed and for
how long care could be provided
Identification of home-care agency, assisted living facility and nursing home facility if needed
Alternatively, costs (before inflation) could be provided instead of specific agencies and facilities; these costs should reflect the level of comfort and care the client desires if care is needed
Jack P Paul Actuary LLC will provide these cost assumptions if requested
COPYRIGHT 2009 JACK P PAUL ACTUARY LLC
Questionnaire
Existing long-term care insurance in force Company Type of coverage (home care vs. facility) Premium Benefit period Daily/monthly benefit amount Inflation provisions Other riders Life insurance/annuity benefits that can be used to pay for long-term care
costs
Existing in-force insurance/annuities: Life Insurance Annuities Medicare Part C; Part D
COPYRIGHT 2009 JACK P PAUL ACTUARY LLC
Questionnaire (cont.)
Economic assumptions
Interest rate to discount expenses (rate that theoretically would be what a client thinks he can earn on his existing assets) (after tax)
Inflation of costs (chosen by client and by the financial professional with input from Jack P Paul Actuary LLC if desired) (several different inflation rates are applicable)
Determining correct level of morbidity If you screen for long-term care insurability, what is the anticipated classification of
the client (preferred, select, substandard (with rating), or uninsurable)
If not, a questionnaire will be provided; it will have screening and underwriting questions to determine a preliminary determination of the morbidity classification
The initial report will be based on this determination. If an insurance company determines a different classification, I will produce a revised report (free of charge)
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Questionnaire (cont.)
Determining correct level of morbidity (cont.) A questionnaire will be provided section to determine the level of mortality of
the client
In cases where the client’s expected mortality is above a certain level, we may need additional information (including Attending Physician’s Statements) to determine the correct level of mortality. To obtain this information, we will obtain permission (through the financial planning professional) from the client.
In some cases, the questionnaire will be sent to an outside service for evaluation.
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Questionnaire (cont.)
To compute the chances of meeting the client’s goals, information is needed for: Goals
Income
Assets
Expenses
Liabilities
Investment/disinvestment strategies
Tax
Estate
Insurance and Annuities
COPYRIGHT 2009 JACK P PAUL ACTUARY LLC
Questionnaire (cont.)
INFORMATION NEEDED TO COMPUTE PROBABILITIES OF SUCCESS
Information needed to compute probabilities of success The information needed on the previous slide generally the
information available as input into the base plan created by the financial planner for the client
Most of the information can be obtained by sending the client files (if run on financial planning software such as NaviPlan, Advice America, Moneyguide Pro or Money Tree); other information will be requested
If needed, a spreadsheet will be provided to input the required information
The ReportSECTIONS
Introduction The purpose of the report Explanation of report contents Profile of the client
Results of the mortality assessment Classification into mortality table Life expectancy – total and in various long-term care states Probability of living to certain ages
Results of the morbidity assessment
Classification into morbidity class
The Report (Cont.)
Customized Long-term Care Information Probability distribution of costs
With and without insurance
Customized Prescription Drug Cost Information Probability distribution of costs
With Medicare Part D, if applicable
Examination of Goals List of what goals were examined
Probability of meeting each goal
Probability of meeting all goals
COPYRIGHT 2009 JACK P PAUL ACTUARY LLC
The Report (cont.)
The Report (Cont.)
Changes in strategies, assumptions List of what scenario changes were examined
Results of changes
After feedback from the client and planner, a revised/final report will be issued
Methodology used
Assumptions used
Caveats about the process and report
A section about Jack P Paul Actuary LLC
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The Report (cont.)
Assumptions Used In PDRP Plus
To perform the analysis I build in client information (listed in the questionnaire) as well as assumptions:
Incidence of needing long-term care Broken down between being unable to perform: one Activity of Daily
Living or one or more Instrumental Activities of Daily Living, two or more Activities of Daily Living (ADL) (or Cognitive Impairment), and needing long-term care out of Medical Necessity
Broken down between needing home care, needing an assisted living facility or needing a nursing home
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Assumptions (cont.)
Once having incurred the need for long-term care…. The probabilities of continuing to need it (continuance rates)
The probability of recovery
The probability of death
The probability of transitioning to another level of care (for example, from home care to an assisted living facility)
The cost of long-term care, which varies by the number of ADLs that can’t be done, as well as a reduction in nursing home costs due to Medicare paying the first days of nursing home cost (applicable when the client goes directly from a hospital to a nursing home)
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Assumptions (cont.)
The probability of getting one or more of six chronic conditions
The prescription costs associated with the chronic conditions
The probability of getting Alzheimer’s disease and its effect on prescription drug costs
The probability of death while not currently needing Long-term care
Cost of Care – input as described earlier
Economic assumptions – input as described earlier
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Assumptions (cont.)
COPYRIGHT 2009 JACK P PAUL ACTUARY LLC
Insurance policy features Premium Benefit period Daily or monthly benefit amount Inflation provisions
Assumptions on Assets Means, standard deviations, covariances – for nine
asset classes; adjusted for future inflation expectations; overrides possible
Sources Of AssumptionsThe following sources were used: Society of Actuaries Intercompany Study on Long-Term Care 1984-2004 COLLECTION AND ANALYSIS OF DEMOGRAPHIC EXPERIENCE OF CONTINUING CARE
RETIREMENT COMMUNITY RESIDENTS by Barney and Bond Transactions of the Society of Actuaries 1995 - Long Term Care Insurance Valuation Methods Transactions of the Society of Actuaries 1988-1990 Report of the Long-Term Care Experience Committee
– 1985 National Nursing Home Survey Utilization Data Medicare.gov Agingstats.gov SSA.gov Society of Actuaries study on Transfer Rates Between Long Term Care Claim Settings Society of Actuaries Intercompany Life Insurance Mortality Study Society of Actuaries studies on 2008 Valuation Basic Table Report Notes from the 2004 Annual Society of Actuaries meeting Gilbert Guide is used where necessary Publicly available information from state insurance departments 2009 LTC Sourcebook Fi360 Asset – Allocation Optimizer input information
COPYRIGHT 2009 JACK P PAUL ACTUARY LLC
About This Product Long-term care is a relatively new product. Actuarial experience for
incidence and continuance rates has not been tracked for as long as other more established products such as mortality or disability
This may be the first use of chronic conditions to compute prescription drug costs for financial planning
Some of the assumptions needed for the actuarial analysis have only relatively small amounts of experience from which to track. These include:
transition rates from one type of long-term care to another, as well as recovery rates
The relationship between incidence rates for 2 or more ADLs or cognitive impairment and medical necessity
The split between assisted living facility and nursing home incidence, continuance and mortality rates
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Caveats (cont.)
For certain of the assumptions needed I relied on broad-based methods (such as ensuring total costs are within certain guidelines)
I made certain adjustments to ensure consistency between assumptions and to ensure results in total are reasonable
Jack P Paul Actuary LLC does not offer, through its consulting, software or otherwise, tax or investment advice of any kind. All results do not reflect actual investment results and are not guarantees of any kind
Jack P Paul Actuary LLC does not take independent measures to check the accuracy of client information supplied, including, but not limited to, fixed expenses, existing assets, goals and tax brackets
COPYRIGHT 2009 JACK P PAUL ACTUARY LLC
Methodology
I have produced a proprietary actuarial model with the assumptions listed above to produce 25,000 liability scenarios, which are then used to produce probability distributions of mortality as well as of long-term care and prescription drug costs
These probability distributions are used in the measuring of the chances of reaching various client goals related to retirement and other spending goals
COPYRIGHT 2009 JACK P PAUL ACTUARY LLC
Methodology (Cont.)
A “Monte Carlo” projection model was built which, given information about assets in the client’s portfolio, computes hypothetical annual returns for the portfolio for each of 500 runs. These hypothetical returns assume that the returns are from the multivariate normal distribution
A summary system was created that incorporates results from the liability and asset models to compute the chances of client success for each of the client’s goals
COPYRIGHT 2009 JACK P PAUL ACTUARY LLC
About Jack Paul
I am a Fellow of the Society of Actuaries and a Member of the American Academy of Actuaries
I have three designations from the American College - Chartered Financial Consultant (ChFC), Chartered Life Underwriter (CLU) and Chartered Advisor for Senior Living (CASL)
I have over thirty years of actuarial experience, most recently as SVP and Chief Actuary of Fidelity Mutual Life Insurance Company
I have been developing this product for over 18 months to help serve comprehensive financial planners
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Jack Paul
Here Is A Proposal For You
I will be happy to apply my product to one of your clients at no charge
I would just like your feedback on the product as your client's report is produced
You of course would be in complete control of your client relationship; I would just be working with you or with you and your client together - never me and your client alone
COPYRIGHT 2009 JACK P PAUL ACTUARY LLC
Questions? Comments?
COPYRIGHT 2009 JACK P PAUL ACTUARY LLC