An Actuarial Analysis ofRetirement Goals and RisksA Tool For FinancialPlanning ProfessionalsCOPYRIGHT 2009 to 2013 JACK PP...
Developed byJack P Paul, FSA, MAAA, CLU, ChFC, CASLPresident, Jack P Paul Actuary LLC101 Mill Creek Road Suite CArdmore, P...
This new tool is a Probability Distribution Of Your Client’sMajor Unknown Expense Risks Faced at RetirementIntroduction H...
What can PDRP Plus do for you? PDRP Plus can help you compute the chance that the client willmeet his/her goals more accu...
What is Currently Done in Financial ProjectionsTo Project the Chances of Meeting Clients’ Goals?
Traditional Financial Projections Usually, projections are focused on living expenses. These expenses are generally fixed...
Traditional Financial Projections (cont)Time Horizon: The retirement planning time horizon is usually either: until the l...
Traditional Financial Projections (cont)Regular Health Costs: There is wide variation in modeling health costs. Often the...
Traditional Financial Projections (cont)Monte Carlo Testing: Asset “Monte Carlo” testing is often done on the client’s as...
Traditional Financial Projections (cont)What are the implications of performing testing this way? By not correctly analyz...
These problems areaddressed in this product!SMARTER PLANNING:PDRP Plus
A Probability Distribution of YourClient’s Major Unknown Expense RisksCOPYRIGHT 2009 to 2013 JACK PPAUL ACTUARY LLCHealth ...
COPYRIGHT 2009 to 2013 JACK PPAUL ACTUARY LLCSample Chart of Client’s Projected Range of Long-TermCare Costs Sample 65 ye...
Here is a sample graphic of the chart in the previous slide. The bottom line (X-axis) shows the chancesout of 10,000 that ...
 The above chart does not display the totaldollar costs that may be spent over theclient’s lifetime! Those costs are hig...
Probability Total Dollar costs wont exceed:1% 05% 010% 015% 020% 025% 030% 035% 040% 045% 7,00050% 15,00055% 28,00060% 50,...
What Makes This Information about Long-Term Care CostsUnique?The long-term care costs for the remaining lifetime of an ins...
This Information Is CustomizedTo The ClientCLIENT PROFILE: Appropriate for singles or couples - currently my product hand...
This Information Is Customized To TheClient (Cont.)RATES & INSURANCE: The appropriate rate to use to discount long-term c...
This Information Is Customized To The Client(Cont.)MORBIDITY AND MORTALITY ASSESSMENTS A morbidity screener (a questionna...
This Information Is Customized To The Client(Cont.) For the sample case above, the client will spend, on average, 20.20 y...
COPYRIGHT 2009 to 2013 JACK PPAUL ACTUARY LLCHow Long-Term Care Costs are Affected by the Purchase ofa Long-Term Care Insu...
COPYRIGHT 2009 to 2013 JACK PPAUL ACTUARY LLCAmount of assets set aside will notexceed:Probability:WithoutInsurance: With ...
The Big Advantage of LTC Insurance: A client can choose to purchase or notpurchase LTC insurance. On a present value bas...
The Big Advantage of LTC Insurance: The advantage is in the amountsover/underpaid: Again, on a present value basis: If ...
Regular Health Care andPrescription Drug Costs Probability distributions are created for theseimportant costs as well! T...
COPYRIGHT 2009 to 2013 JACK PPAUL ACTUARY LLCCombining the ProbabilityDistribution with the Client’s:Asset Portfolio,Inves...
Computing the Probabilities of Successfully Meeting the Client’s GoalsCOPYRIGHT 2009 to 2013 JACK PPAUL ACTUARY LLC The e...
How Does the Combining Take Place? Exclusive software created by Jack P Paul Actuary LLCCOPYRIGHT 2009 to 2013 JACK PPAUL...
How Does the Combining TakePlace? (Cont.) PDRP Plus, to compute the probabilities of successfully meeting the client’sgoa...
How Does the Combining TakePlace? (Cont.) If the client’s chances for success are too low (asdetermined by the financial ...
PDRP Plus: To measure the long-term care and prescription drug expenses,25,000 random scenarios (Monte Carlo scenarios) a...
 These runs are combined with the other living expenses of the client. Theseexpenses will increase each year by inflation...
Asset modeling in PDRP PLUS PDRP Plus works best when the assets, investment strategy and disinvestmentstrategy of the cl...
Asset modeling in PDRP PLUS(Cont.) For each asset class, means and variances, along with the covariances betweenasset cla...
Other Modeling Considerations inPDRP PLUS Certain assets, such as health savingsaccount balances, insurance policies anda...
Insurance and Annuity Modelingin PDRP PLUSPDRP Plus accommodates a wide variety ofinsurance and annuity products: Insuran...
Insurance and Annuity Modelingin PDRP PLUS (Cont.) Annuities Deferred Immediate DIA/Longevity Structured SettlementsI...
Reverse Mortgages PDRP PLUS can incorporate reversemortgages into the projection. Different reverse mortgage strategies ...
Comparison of a TraditionalProjection and an Actuarial AnalysisFor a given client (described on the next slide), here is a...
Comparison of a TraditionalProjection and an Actuarial AnalysisCASE STUDY/CLIENT: Age 65 male, single, no dependents Sta...
Comparison of a Traditional Projection and an ActuarialAnalysis (cont.)COPYRIGHT 2009 to 2013 JACK PPAUL ACTUARY LLCActuar...
Comparison of a Traditional Projection and anActuarial Analysis (cont.)COPYRIGHT 2009 to 2013 JACK PPAUL ACTUARY LLCActuar...
Comparison of a Traditional Projection and anActuarial Analysis (cont.)COPYRIGHT 2009 to 2013 JACK PPAUL ACTUARY LLCCommen...
Comparison of a Traditional Projection and anActuarial Analysis (cont.)COPYRIGHT 2009 to 2013 JACK PPAUL ACTUARY LLCCommen...
Comparison of a traditional projection and anactuarial analysis (cont.)COPYRIGHT 2009 to 2013 JACK PPAUL ACTUARY LLC The ...
PDRP Plus (Actuarial) Analysis vs Traditional Financial ProjectionTraditional Projection# of Asset Runs 1000 (can be adjus...
PDRP Plus (Actuarial) Analysis vs Traditional Financial Projection (cont.)Traditional ProjectionLiving Expenses Based on i...
PDRP Plus (Actuarial) Analysis vs Traditional Financial Projection (cont.)Traditional ProjectionAsset Information used in ...
Step by Step Process toProduce a Client AnalysisCOPYRIGHT 2009 to 2013 JACK PPAUL ACTUARY LLCFor each client of the financ...
The questionnaire contains the following requests forinformation: Basic information about the client and spouse (if appli...
 Existing long-term care insurance in force Company Type of coverage (home care vs. facility) Premium Benefit period...
 Economic assumptions Interest rate to discount expenses (rate that theoretically would be what a clientthinks he can ea...
 Determining correct level of mortality A questionnaire will be provided section to determine the level of mortality oft...
 To compute the chances of meeting the client’s goals, information is needed for: Goals Income Assets Expenses Liabi...
Information needed to computeprobabilities of success Much of the information needed on the previous slide isgenerally av...
The ReportSECTIONS Introduction The purpose of the report Explanation of report contents Profile of the client Result...
The Report (Cont.) Customized Long-term Care Information Probability distribution of costs With and without insurance ...
The Report (Cont.) Combined Information Probability distribution of all three costs With and without the applicable ins...
The Report (Cont.) Strategies, assumptions List of what scenarios were examined Results of the various scenarios After...
Assumptions Used In PDRP PlusTo perform the analysis I build in client information(listed in the questionnaire) as well as...
Assumptions (cont.)Once having incurred the need for long-term care…. The probabilities of continuing to need it (continu...
Assumptions (cont.)Also… The probability of getting one or more chronic conditions, includingAlzheimer’s disease The pre...
Assumptions (cont.)COPYRIGHT 2009 to 2013 JACK PPAUL ACTUARY LLCInsurance and annuity features Premium Benefit period D...
Assumptions (cont.)Assumptions concerning AssetsMeans, standard deviations, covariances – fortwelve asset classes; adjuste...
Sources Of AssumptionsThe sources that were used to produce the reports include: Society of Actuaries Intercompany Study ...
About This Product Long-term care is a relatively new product. Actuarial experience forincidence and continuance rates ha...
Caveats (cont.) For certain of the assumptions needed I relied on broad-basedmethods (such as ensuring total costs are wi...
MethodologyI have produced a proprietary actuarial model with theassumptions listed above to produce 25,000 liabilityscena...
Methodology (Cont.)A “Monte Carlo” projection model was built which, giveninformation about assets in the client’s portfol...
About Jack Paul I am a Fellow of the Society of Actuaries and a Member of theAmerican Academy of Actuaries I have three ...
Questions? Comments?COPYRIGHT 2009 to 2013 JACK PPAUL ACTUARY LLC
Pdrp plus detailed presentation 2013  - by jack paul actuary, llc
Pdrp plus detailed presentation 2013  - by jack paul actuary, llc
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PDRP PLUS, ANALYZING RETIREE HEALTH COSTS!

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Pdrp plus detailed presentation 2013 - by jack paul actuary, llc

  1. 1. An Actuarial Analysis ofRetirement Goals and RisksA Tool For FinancialPlanning ProfessionalsCOPYRIGHT 2009 to 2013 JACK PPAUL ACTUARY LLCProbability Distributions forRetirement PlanningPDRP Plus
  2. 2. Developed byJack P Paul, FSA, MAAA, CLU, ChFC, CASLPresident, Jack P Paul Actuary LLC101 Mill Creek Road Suite CArdmore, PA 19003610-649-2358Website: JackPaulCASL.comJack@Jackpaulcasl.comCopyright 2009 to 2013 Jack P Paul Actuary
  3. 3. This new tool is a Probability Distribution Of Your Client’sMajor Unknown Expense Risks Faced at RetirementIntroduction Health Care Costs Long – term Care Costs Prescription Drugs LongevityWhich can be Combined with your Client’sTo Compute the Probabilities of Successfully Meeting the Client’s Goals,including having the Client’s Assets Last For Life. Asset Portfolio Investment, Annuity and Insurance Strategies Living and Other Expenses (Planned Spending)
  4. 4. What can PDRP Plus do for you? PDRP Plus can help you compute the chance that the client willmeet his/her goals more accurately and comprehensively than iscurrently done by financial planning software. PDRP Plus increases the knowledge given to your clients. PDRP Plus can validate prospective investment allocations andcompare the chances of success with varying investmentallocations. BECAUSE OF THIS: PDRP Plus will allow you to attract more business and assetsunder management, as it will give you an advantage over otherfinancial planners. PDRP Plus can bring in more income per client.
  5. 5. What is Currently Done in Financial ProjectionsTo Project the Chances of Meeting Clients’ Goals?
  6. 6. Traditional Financial Projections Usually, projections are focused on living expenses. These expenses are generally fixedbut 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 lowor 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 fixedevent, such as projecting, say, a two year stay in a nursing home starting at age 80. Theimplicit claim is that if the client can afford this nursing home stay, he/she should be able tomeet his/her retirement goals; in fact, sometimes the client’s retirement strategies(spending, investment, insurance) are adjusted to meet the client’s goals assuming thislong-term care event actually occurs. There is no attempt to figure out the probability of thishappening, or to use more likely events occurring, or to incorporate a continuum of eventshappening with their corresponding probabilities. This can easily lead (as will be shown) tostrategy recommendations that “miss the mark” An evaluation of an insurance purchase is usually done assuming a claim occurs, ignoringthe chances of that claim occurringExpenses:
  7. 7. Traditional Financial Projections (cont)Time Horizon: The retirement planning time horizon is usually either: until the life expectancy ofthe client; or a fixed advanced age (say, age 95 for an age 65 client). This lifeexpectancy of the client is based on general averages, and not on any evaluationof 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 thecomputation of the client’s chances of meeting his goals. However, it is notcustomized to the mortality profile of the client; it is based on general averagesPrescription Drugs: Prescription drugs, if modeled, are usually modeled based on the currentprescription drug use (with inflation) and not on possible future increased use Prescription drug use can cost a significant amount of money (even with MedicarePart D), and can have an impact on the client’s goals
  8. 8. Traditional Financial Projections (cont)Regular Health Costs: There is wide variation in modeling health costs. Often the premiums for MedicarePart B are used by themselves. Sometimes Medicare Supplement, (also known asMedigap) insurance is assumed to be purchased and the premiums for that areincluded. If Medicare Supplement Plan F is purchased, there is coverage for most,if not all, of the client’s regular health care costs. However, if a lesser (or no)Medicare Supplement Plan is purchased, the amount of copays and deductibleseach year are almost always ignored in modeling. No analysis is usually done to determine whether a Medicare Supplement Plan is acost-effective option for the client. Whether it is or not depends on the health of theclient. An analysis will become critical for new Medicare enrollees starting in 2017,if the proposals from the White House are put into place. These proposals willrequire surcharges to all new beneficiaries starting in 2017 who purchaseMedicare Supplement Plan F.
  9. 9. Traditional Financial Projections (cont)Monte Carlo Testing: Asset “Monte Carlo” testing is often done on the client’s asset portfolio to see ifthe amount of assets, along with the investment strategy, will allow the client tomeet his/her goals This testing is done with one or two expense scenarios, not with acomprehensive analysis of the client’s health care, long-term care, mortality andprescription drug risks Note that a single level investment return assumption is still very common intraditional financial projections
  10. 10. Traditional Financial Projections (cont)What are the implications of performing testing this way? By not correctly analyzing the client’s health care, long-term care,mortality and prescription drug risks, recommendations are made thatuse miscalculated chances of the client’s success in meeting his/hergoals If that chance is understated, the financial planner often recommendsstrategies to increase the chance of success. That would possiblyunnecessarily require the client to cut back his/her spending inretirement, which would be a disservice to the client If that chance is overstated, it would lead to some clients failing to haveenough money to meet their goals, even though the recommendationsof the financial plan were followed
  11. 11. These problems areaddressed in this product!SMARTER PLANNING:PDRP Plus
  12. 12. A Probability Distribution of YourClient’s Major Unknown Expense RisksCOPYRIGHT 2009 to 2013 JACK PPAUL ACTUARY LLCHealth Care, Long Term Careand Prescription Drug Costs
  13. 13. COPYRIGHT 2009 to 2013 JACK PPAUL ACTUARY LLCSample Chart of Client’s Projected Range of Long-TermCare Costs Sample 65 year oldsingle male who isinsurable at standardrates for long-term careinsurance. He has chosen a plan oflong-term care that costswell above the nationalaverage, should he needit.Probability Amount of Assets Set Aside Won’t Exceed:1% 05% 010% 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% 462,00099.50% 534,000Chart displays the Probabilities that the Future Long-Term CareCosts of the Client Will Be Met By Setting Aside Certain Levels ofAssets (displayed before tax)
  14. 14. Here is a sample graphic of the chart in the previous slide. The bottom line (X-axis) shows the chancesout of 10,000 that the costs will be at or below the level of the blue line. For instance, for this client, thereis, as you can see by the chart in the previous slide, (approximately) a 90% chance that the amount ofassets need to provide future long-term costs will be no more than $160,000.01000002000003000004000005000006000007000008000009000001 501 1001 1501 2001 2501 3001 3501 4001 4501 5001 5501 6001 6501 7001 7501 8001 8501 9001 9501Series1COPYRIGHT 2009 to 2013 JACK PPAUL ACTUARY LLC
  15. 15.  The above chart does not display the totaldollar costs that may be spent over theclient’s lifetime! Those costs are higher than the ones in thechart. Those costs ignore the time value ofmoney For comparison, the following chart displaysthe probabilities that the total costs do notexceed the amounts shown:COPYRIGHT 2009 to 2013 JACK PPAUL ACTUARY LLC
  16. 16. Probability Total Dollar costs wont exceed:1% 05% 010% 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% 1,710,00099.50% 2,006,000COPYRIGHT 2009 to 2013 JACK PPAUL ACTUARY LLCTotal dollar costs over theclient’s lifetime
  17. 17. What Makes This Information about Long-Term Care CostsUnique?The long-term care costs for the remaining lifetime of an insurable person can vary verywidely, from zero to over a half of 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 providersavailable 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 personowns or will own.No where else are all these factors combined into one analysis to examine the range ofcosts, and (as you’ll see later) the effect of an insurance purchase on the range ofcosts.COPYRIGHT 2009 to 2013 JACK PPAUL ACTUARY LLC
  18. 18. This Information Is CustomizedTo The ClientCLIENT PROFILE: Appropriate for singles or couples - currently my product handles those 60 and over My product is currently suitable for insurable as well as many uninsurable individuals PLAN OF CARE: A plan of care, in which, after discussions between the client and the financial planningprofessional, 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 nursinghome care is needed. This will include a decision as to whether the spouse or other unpaidperson will take care of the client before paid care is needed. Note that average costs canalways be substituted if desired for the plan of care. The costs of this plan of care will beincorporated into the projectionCOPYRIGHT 2009 to 2013 JACK PPAUL ACTUARY LLC
  19. 19. This Information Is Customized To TheClient (Cont.)RATES & INSURANCE: The appropriate rate to use to discount long-term care costs in future years, which dependson the clients comfort level as to the future performance of the clients assets Various inflation rates chosen in consultation with the client The appropriate insurance policy to purchase, if any. This will be done through comparisonof insurance policies and features within policies to see the effect each one has on the totalprobability distributionCOPYRIGHT 2009 to 2013 JACK PPAUL ACTUARY LLC
  20. 20. This Information Is Customized To The Client(Cont.)MORBIDITY AND MORTALITY ASSESSMENTS A morbidity screener (a questionnaire, with optional telephone interview and attendingphysician statements in certain cases) assigns the client to a level of morbidity. Thequestionnaire is completed and evaluated by either Jack P Paul Actuary LLC or an outsideservice A mortality screener (a questionnaire) is used to assign the client to a level of mortality anda mortality table, which gives the average rate of a person dying each year, which is usedto 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 ofthe Relative Risk tables of the Society of Actuaries (modified by Jack P Paul Actuary LLC),or, in some cases, in terms of general population mortality tables. The mortality levels aredifferent depending on smoking status. A chart of the mortality table, as well as the tableitself, are included in the report that is provided. This information is valuable, as it gives theclient a perspective from which to view his financial plan The levels of morbidity and mortality are combined to compute the average time a client canexpect to be healthy, needing home care, in an assisted living facility and in a nursing home
  21. 21. 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 anursing home Prescription drug use is based on having/obtaining one or more of eight chronic conditions,along with the current levels of prescription drug costs. Additional costs are incurred withthe chances of getting Alzheimer’s disease. The costs are adjusted if the client has aMedicare Part D type (or other) prescription drug plan. The eight chronic conditions areAlzheimer’s, arthritis, cancer, stroke, respiratory, hypertension, heart disease and diabetes.The information on the government website www.agingstats.gov was used to produceprobabilities of obtaining these chronic conditions.
  22. 22. COPYRIGHT 2009 to 2013 JACK PPAUL ACTUARY LLCHow Long-Term Care Costs are Affected by the Purchase ofa Long-Term Care Insurance PolicyProbabilityAmount of Assets Set Aside Won’tExceed:1% 15,0005% 34,00010% 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% 307,00099.50% 370,000The long-term care insurance policy: Has a four-year benefit period Has a daily benefit amount of $200/day Is a comprehensive policy covering bothhome care (at 100%) as well as facilitycare An inflation provision of 5% compound An annual premium of $4,961 (paidmonthly)
  23. 23. COPYRIGHT 2009 to 2013 JACK PPAUL ACTUARY LLCAmount of assets set aside will notexceed:Probability:WithoutInsurance: With Insurance:1% 0 15,0005% 0 34,00010% 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% 462,000 307,00099.50% 534,000 370,000Comparison of Long-Term Care Costs and Purchase of Long-Term Care Policy (cont.)• As you can see from the chart, theinsurance “blunts” the higher costs. Forexample, there is an 90% chance that thetotal long-term care costs without insurancewill be no more than $160,000. With theinsurance, 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 thetime, the present value of long-term carecosts with insurance will be higher than thecosts without it. (This calculation will beincluded in the reports I produce)• The average percent of premiums paid outin benefits, taking into account this client’smorbidity and mortality profiles and thepersonalized plan of care was 51.4%. Thatmeans that the insurance company kept48.6% of the premiums for benefits,expenses and profit. (This can beinterpreted as the company “loss ratio” –the higher the better for the client)
  24. 24. The Big Advantage of LTC Insurance: A client can choose to purchase or notpurchase LTC insurance. On a present value basis: For the example in the previous slide, 81.14%of the time the client will wind up having paidmore for their long-term care costs if they hadbought the insurance. So 18.86% of the timethe client will save money if they had boughtthe insurance…
  25. 25. The Big Advantage of LTC Insurance: The advantage is in the amountsover/underpaid: Again, on a present value basis: If they buy the insurance, the amountoverpaid will be $70,000 or less BUT – if they don’t buy the insurance, theamount overpaid could be more than$230,000! This information will be customized to theclient, and is available nowhere else!
  26. 26. Regular Health Care andPrescription Drug Costs Probability distributions are created for theseimportant costs as well! The costs of all three are displayed for theclient: Separately Combined If the client is a couple, the costs are displayedseparately for each member of the couple andthen displayed for both members together
  27. 27. COPYRIGHT 2009 to 2013 JACK PPAUL ACTUARY LLCCombining the ProbabilityDistribution with the Client’s:Asset Portfolio,Investment Strategy, andExpenses:
  28. 28. Computing the Probabilities of Successfully Meeting the Client’s GoalsCOPYRIGHT 2009 to 2013 JACK PPAUL ACTUARY LLC The expenses, annuity and insurance purchases, investment strategies, assetsand other aspects of the client’s plan can be combined with the probabilitydistributions 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
  29. 29. How Does the Combining Take Place? Exclusive software created by Jack P Paul Actuary LLCCOPYRIGHT 2009 to 2013 JACK PPAUL ACTUARY LLCPDRP Plus
  30. 30. How Does the Combining TakePlace? (Cont.) PDRP Plus, to compute the probabilities of successfully meeting the client’sgoals, performs “Monte Carlo” testing on the client’s financial goals. PDRP Plus’s Monte Carlo testing involves simulations of the client’s futurefinancial and health outcomes. For each simulation, PDRP Plus steps through apossible way the client’s financial situation and health plays out, month by monthfrom the client’s current age until death. Some scenarios last for as little as onemonth; others can last 50 years or more. The simulation’s outcome isdependent on the probabilities of different financial and health outcomesoccurring. A simulation is considered successful for a goal if there is enough money to fundthat goal at the proper time. For the goal of having enough money to last theclient’s lifetime, the simulation counts that goal as successful if the amount ofassets is above a certain client-selected tolerance at death. The number ofscenarios that are successful, divided by the number of runs (often 25,000,000)gives the chance that the client will meet his/her goals. The chances of success are computed by goal.
  31. 31. How Does the Combining TakePlace? (Cont.) If the client’s chances for success are too low (asdetermined 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 beperformed until the client is satisfied (or the chancesof success maximized)!
  32. 32. 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 ofinsurance, 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 health care cost varies The amount of prescription drug cost variesCOPYRIGHT 2009 to 2013 JACK PPAUL ACTUARY LLCHow Does the Combining TakePlace? (Cont.)
  33. 33.  These runs are combined with the other living expenses of the client. Theseexpenses will increase each year by inflation. These include day-to-day livingexpenses and other expenses not associated with long-term care andprescription drug expense Additional expenses are input for other goals the client may have, such asvacation or the purchase of new cars 1,000 Asset scenarios are created These 1,000 Asset scenarios are combined with the fixed expenses and the25,000 liability scenarios, to produce a total of 25,000,000 “tests” of whether theclient’s goals will be reached. Each test that reaches the client’s goals is markedsuccessful The number of the “tests” that are marked successful, divided by 25,000,000,gives the chances that the client will meet his/her goalsCOPYRIGHT 2009 to 2013 JACK PPAUL ACTUARY LLCPDRP Plus (cont.):How Does the Combining TakePlace? (cont.)
  34. 34. Asset modeling in PDRP PLUS PDRP Plus works best when the assets, investment strategy and disinvestmentstrategy of the client are each categorized into one or more of 12 fixed assetclasses: 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
  35. 35. Asset modeling in PDRP PLUS(Cont.) For each asset class, means and variances, along with the covariances betweenasset classes, are used to project returns on each asset class for thesimulations The information is based on historical data for the asset classes, analyzed usingthe 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 someworse 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 returnsthat can be provided by the financial planner over and above the average, lessthe amount of charges by the planner for advice and administration The planner can also “override” means, to grade from current values intohistorical 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 assetclasses.
  36. 36. Other Modeling Considerations inPDRP PLUS Certain assets, such as health savingsaccount balances, insurance policies andannuity contracts are incorporated into theprojection Income of the client is incorporated into theprojection Liabilities of the client are incorporated intothe projection
  37. 37. Insurance and Annuity Modelingin PDRP PLUSPDRP Plus accommodates a wide variety ofinsurance and annuity products: Insurance Permanent Term Universal LifeInterest rates are dynamic and based on theinvestment scenarioEstate plan handling of insurance is duplicatedin PDRP Plus.
  38. 38. Insurance and Annuity Modelingin PDRP PLUS (Cont.) Annuities Deferred Immediate DIA/Longevity Structured SettlementsInterest rates are dynamic and based on theinvestment scenarioEstate plan handling of annuities is duplicated inPDRP PlusGuaranteed Withdrawal benefits accommodatedExtra withdrawal privileges accommodated (forexample, when client is on LTC)
  39. 39. Reverse Mortgages PDRP PLUS can incorporate reversemortgages into the projection. Different reverse mortgage strategies can beanalyzed to maximize their benefits to theclient: Using at outset Using when other assets are spent
  40. 40. Comparison of a TraditionalProjection and an Actuarial AnalysisFor a given client (described on the next slide), here is a computation ofthe probabilities for meeting the goal of not running out of money beforedeath.COPYRIGHT 2009 to 2013 JACK PPAUL ACTUARY LLCActuarial Analysis Traditional Projection 1000 asset runs are performed Each run with 25,000 liability runs 1000 asset runs are performed Each using same liability projection
  41. 41. Comparison of a TraditionalProjection and an Actuarial AnalysisCASE STUDY/CLIENT: Age 65 male, single, no dependents Standard, insurable LTC risk Measured to have expected future mortality similar to the mortality underlying the RR100Society 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 12 asset classes mentioned earlier; only four assetclasses 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 realized gains each year, with carryforward of unused losses. 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.COPYRIGHT 2009 to 2013 JACK PPAUL ACTUARY LLC
  42. 42. Comparison of a Traditional Projection and an ActuarialAnalysis (cont.)COPYRIGHT 2009 to 2013 JACK PPAUL ACTUARY LLCActuarial Analysis Traditional Projection LTC costs based on customized plan of care Prescription drugs – normalized to client’s currentuse Health care costs – normalized to client’s health andinsurance plans Morbidity and mortality profiles used 1000 asset runs combined with 25,000 liability runs Goal is to have assets last for life Goal is measured by how many of the 25,000,000runs have assets greater than zero when client dies 500 Asset runs using one setof spending Done two ways: Assumingclient lives to 85; assumingclient lives to 95 LTC event: Client will need atwo year stay in a nursinghome with higher than averagecost at age 80 (same cost levelas was used in the actuarialanalysis), then recover – theLTC scenario was set this waybecause it was felt that if thereis enough money for the clientwith this scenario, the clientwill be in a good financialposition.
  43. 43. Comparison of a Traditional Projection and anActuarial Analysis (cont.)COPYRIGHT 2009 to 2013 JACK PPAUL ACTUARY LLCActuarial Analysis Traditional Projection Chance of meeting goal: 81% Chance of meeting goal if living expensesare reduced by 10%: 86% Chance of meeting goal if living expensesare reduced by 20%: 90% The major chances of failure are moredriven for this client by the high cost of thelong-term plan of care chosen, as well asthe range of future health care andprescription drug costs, than by the levelof living expensesRESULTS Chance of meeting goal: 68% if lives toage 85, 51% if lives to 95 Chance of meeting goal if living expensesare reduced by 10%: 78% if lives to age85, 67% if lives to age 95 Chance of meeting goal if living expensesare reduced by 20%: 85% if lives to age85, 79% if lives to age 95
  44. 44. Comparison of a Traditional Projection and anActuarial Analysis (cont.)COPYRIGHT 2009 to 2013 JACK PPAUL ACTUARY LLCComments The results of the traditional projection vary from a 51% chance of the client not outlivinghis money to an 85% chance Which scenario is appropriate? What are the probabilities that the long-term carescenario 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 onthe client’s lifestyle) a good idea, considering the scenario chosen may be unlikely? Is ita service to the client to base recommendations on scenarios that have an unknownlikelihood of coming true? Traditional scenarios don’t take into account the variability of health care andprescription drug costs. How will the client’s finances be affected if he gets a series ofchronic conditions with associated high prescription drug costs? What is the probabilityof that happening? The actuarial analysis solves this problem. There is no need to devise a single orhandful of scenarios as a criteria for whether the client’s goals will be met. Itcomputes the chance of success (not outliving his money) taking into account theclient’s projected expenses along with the risks of long-term care, health carecosts, prescription drugs and longevity
  45. 45. Comparison of a Traditional Projection and anActuarial Analysis (cont.)COPYRIGHT 2009 to 2013 JACK PPAUL ACTUARY LLCComments (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 acomprehensive manner. The results of each test can be compared toeach other, expressed as the probability of success
  46. 46. Comparison of a traditional projection and anactuarial analysis (cont.)COPYRIGHT 2009 to 2013 JACK PPAUL ACTUARY LLC The actuarial analysis provides detailed, customized informationallowing the financial planner and the client to: Realistically set and measure the chances of achieving the client’sgoals Adjust the client’s investment, spending, annuity and insurancestrategies, as well as the proposed plan of long-term care, to maximizethe chances of achieving the client’s goalsSummary
  47. 47. PDRP Plus (Actuarial) Analysis vs Traditional Financial ProjectionTraditional Projection# of Asset Runs 1000 (can be adjusted) 1000 (can be adjusted within limits)# of Liability Runs 25,000 Under 10Total Number of Runs 25,000,000 Under 10,000Long Term Care Liabilities Customized Plan of careDynamically modeled usingprobability distributionAn event assumed to occur,oftentimes an expensive and unlikelyoneHealth Care and Prescription DrugCostsBased on current and possible futurechronic conditionsEither ignored or current level ofspending used with inflationMorbidity Dynamically modeled usingprobability distributionProbability of needing long-term careanalyzed based on questionnaireHealth care costs and prescriptiondrug use based in part on theprobability of incurring chronicconditionsIgnoredMortality Mortality rates tied to Society ofActuaries’ or General populationmortality tablesCustomized, based on questionnaire(in some cases, based on analysis ofadditional medical information)Projects varying times of deathProjections run until fixed age;sometimes this age is the "lifeexpectancy" however obtained;sometimes this age is high, such asage 95 for a 65 year oldNot based on mortality profile of clientPDRP Plus
  48. 48. PDRP Plus (Actuarial) Analysis vs Traditional Financial Projection (cont.)Traditional ProjectionLiving Expenses Based on information from traditionalfinancial projectionCoveredTaxes Federal taken into account, stateestimatedSometimes comprehensive;sometimes pieces missing (such asdeductibility of health care expense)Goals Based on information from traditionalfinancial projectionCoveredInvestment /Disinvestment Strategies Based on information from traditionalfinancial projection; categorizationoccurs into 12 asset classesCoveredInsurance/Annuity Strategies Long term care, Medicare part D, lifeinsurance, SPIA, DIAs all taken intoaccount as specifiedAll projections are dynamic; thebenefits are adjusted to the actualincidence by scenarioIterations possible to compare variousLTC insurance policiesLong term care is modeled for oneevent; Life insurance is modeled;Annuities modeledProbability of Assumptions Used Taken into account Not specified or computed bysoftwarePDRP Plus
  49. 49. PDRP Plus (Actuarial) Analysis vs Traditional Financial Projection (cont.)Traditional ProjectionAsset Information used in StochasticAsset TestingEach asset categorized into one ormore asset classes.Historical means, variances andcovariances used, adjusted forinflationMultivariate normal distribution usedto project asset returnsFull override capability depending onclient preferences – means, assetclass methodology can be overriddenResults can be duplicated; full controlover random number generatorYear by year output by scenario isavailable for close examinationVaries greatly by software provider:Could project just a single asset witha mean and standard deviation;Could project actual assets, but withnegative returns artificially set to zero;Could project asset classes, withhistorical or projected means,variances, covariances;Results generally vary each timeprojection run, even with exact sameinput; no control over random numbergeneratorYear by year output can’t beexaminedSetting Strategies Allows insurance, plan of care,spending, annuity and investmentstrategies to be analyzed based oncustomized morbidity and mortalityprofiles of client to determine thechances of meeting goalsStrategies not customized tomorbidity or mortality profilesChances of meeting goals only doneon asset side, not on liability sideCannot accurately measure effects oflongevity annuitiesPDRP Plus
  50. 50. Step by Step Process toProduce a Client AnalysisCOPYRIGHT 2009 to 2013 JACK PPAUL ACTUARY LLCFor 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 obtainedfrom the prior preparation of a base financial plan When questionnaire is returned, portions sent to outside firms to produce mortality andmorbidity profiles, if necessary Initial report is prepared by Jack P Paul LLC; this will be approximately two weeks fromthe receipt of the questionnaire Initial report is reviewed with financial planner and client; including initial asset/expenseprojections 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 otherstrategies are examined here A final report is provided
  51. 51. The questionnaire contains the following requests forinformation: Basic information about the client and spouse (if applicable) Information about the anticipated plan of care should the clientneed it Identification of non-paid worker (such as spouse) if needed and forhow long care could be provided Identification of home-care agency, assisted living facility andnursing home facility if needed Alternatively, costs (before inflation) could be provided instead ofspecific agencies and facilities; these costs should reflect the levelof comfort and care the client desires if care is needed Jack P Paul Actuary LLC will provide these cost assumptions ifrequestedCOPYRIGHT 2009 to 2013 JACK PPAUL ACTUARY LLCQuestionnaire
  52. 52.  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 Medicare Supplement InsuranceCOPYRIGHT 2009 to 2013 JACK PPAUL ACTUARY LLCQuestionnaire (cont.)
  53. 53.  Economic assumptions Interest rate to discount expenses (rate that theoretically would be what a clientthinks he can earn on his existing assets) (after tax) Inflation of costs (chosen by client and by the financial professional with inputfrom Jack P Paul Actuary LLC if desired) (several different inflation rates areapplicable) Determining correct level of morbidity If you screen for long-term care insurability, what is the anticipated classificationof the client (preferred, select, substandard (with rating), or uninsurable) If not, a questionnaire will be provided; it will have screening and underwritingquestions to determine a preliminary determination of the morbidity classification The initial report will be based on this determination. If an insurance companydetermines a different classification, I will produce a revised report (free ofcharge)COPYRIGHT 2009 to 2013 JACK PPAUL ACTUARY LLCQuestionnaire (cont.)
  54. 54.  Determining correct level of mortality A questionnaire will be provided section to determine the level of mortality ofthe client In cases where the client’s expected mortality is above a certain level, wemay need additional information (including Attending Physician’sStatements) to determine the correct level of mortality. To obtain thisinformation, we will obtain permission (through the financial planningprofessional) from the client. In some cases, the questionnaire will be sent to an outside service forevaluation.COPYRIGHT 2009 to 2013 JACK PPAUL ACTUARY LLCQuestionnaire (cont.)
  55. 55.  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 AnnuitiesCOPYRIGHT 2009 to 2013 JACK PPAUL ACTUARY LLCQuestionnaire (cont.)INFORMATION NEEDED TO COMPUTE PROBABILITIES OFSUCCESS
  56. 56. Information needed to computeprobabilities of success Much of the information needed on the previous slide isgenerally available as it was used by the base plan created bythe financial planner for the client Most of the information can be obtained by sending the clientfiles (if run on financial planning software such as NaviPlan,Advice America, Moneyguide Pro or Money Tree); otherinformation will be requested If needed, spreadsheets will be provided to input the requiredinformation
  57. 57. 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
  58. 58. 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 Customized Regular Health Care Cost Information Probability distribution of costs With Medicare Supplement insurance, if applicableCOPYRIGHT 2009 to 2013 JACK PPAUL ACTUARY LLCThe Report (cont.)
  59. 59. The Report (Cont.) Combined Information Probability distribution of all three costs With and without the applicable insurances Examination of Goals List of what goals were examined Probability of meeting each goal Probability of meeting all goalsCOPYRIGHT 2009 to 2013 JACK PPAUL ACTUARY LLCThe Report (cont.)
  60. 60. The Report (Cont.) Strategies, assumptions List of what scenarios were examined Results of the various scenarios After feedback from the client and planner, arevised/final report will be issued Methodology used Assumptions used Caveats about the process and report A section about Jack P Paul Actuary LLCCOPYRIGHT 2009 to 2013 JACK PPAUL ACTUARY LLCThe Report (cont.)
  61. 61. Assumptions Used In PDRP PlusTo 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 DailyLiving or one or more Instrumental Activities of Daily Living, two ormore Activities of Daily Living (ADL) (or Cognitive Impairment), andneeding long-term care out of Medical Necessity Broken down between needing home care, needing an assistedliving facility or needing a nursing homeCOPYRIGHT 2009 to 2013 JACK PPAUL ACTUARY LLC
  62. 62. 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, fromhome care to an assisted living facility) The cost of long-term care, which varies by the number of ADLs thatcan’t be done, as well as a reduction in nursing home costs due toMedicare paying the first days of nursing home cost (applicable whenthe client goes directly from a hospital to a nursing home)COPYRIGHT 2009 to 2013 JACK PPAUL ACTUARY LLC
  63. 63. Assumptions (cont.)Also… The probability of getting one or more chronic conditions, includingAlzheimer’s disease The prescription costs associated with the chronic conditions The health costs associated with the chronic conditions The probability of death while not currently needing Long-term care Cost of Care – input as described earlier Economic assumptions – input as described earlierCOPYRIGHT 2009 to 2013 JACK PPAUL ACTUARY LLC
  64. 64. Assumptions (cont.)COPYRIGHT 2009 to 2013 JACK PPAUL ACTUARY LLCInsurance and annuity features Premium Benefit period Daily or monthly benefit amount Inflation provisionsFor annuities Amount of periodic benefit Benefit start date and period Daily or monthly benefit amount Inflation provisions, additional pmt triggers
  65. 65. Assumptions (cont.)Assumptions concerning AssetsMeans, standard deviations, covariances – fortwelve asset classes; adjusted for future inflationexpectations; overrides allowed
  66. 66. Sources Of AssumptionsThe sources that were used to produce the reports include: Society of Actuaries Intercompany Study on Long-Term Care 1984-2010 COLLECTION AND ANALYSIS OF DEMOGRAPHIC EXPERIENCE OF CONTINUING CARERETIREMENT 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 informationCOPYRIGHT 2009 to 2013 JACK PPAUL ACTUARY LLC
  67. 67. About This Product Long-term care is a relatively new product. Actuarial experience forincidence and continuance rates has not been tracked for as long asother more established products such as mortality or disability This may be the first use of chronic conditions to compute prescriptiondrug costs for financial planning Some of the assumptions needed for the actuarial analysis have onlyrelatively small amounts of experience from which to track. Theseinclude: Transition rates from one type of long-term care to another, as wellas recovery rates The relationship between incidence rates for 2 or more ADLs orcognitive impairment and medical necessity The split between assisted living facility and nursing homeincidence, continuance and mortality ratesCOPYRIGHT 2009 to 2013 JACK PPAUL ACTUARY LLC
  68. 68. Caveats (cont.) For certain of the assumptions needed I relied on broad-basedmethods (such as ensuring total costs are within certain guidelines) I made certain adjustments to ensure consistency betweenassumptions 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. Allresults do not reflect actual investment results and are notguarantees of any kind Jack P Paul Actuary LLC does not take independent measures tocheck the accuracy of client information supplied, including, but notlimited to, fixed expenses, existing assets, goals and tax bracketsCOPYRIGHT 2009 to 2013 JACK PPAUL ACTUARY LLC
  69. 69. MethodologyI have produced a proprietary actuarial model with theassumptions listed above to produce 25,000 liabilityscenarios, which are then used to produce probabilitydistributions of mortality as well as of health care, long-term care and prescription drug costsThese probability distributions are used in the measuringof the chances of reaching various client goals related toretirement and other spending goalsCOPYRIGHT 2009 to 2013 JACK PPAUL ACTUARY LLC
  70. 70. Methodology (Cont.)A “Monte Carlo” projection model was built which, giveninformation about assets in the client’s portfolio, computeshypothetical annual returns for the portfolio for each of1000 runs. These hypothetical returns assume that thereturns are from the multivariate normal distributionA summary system was created that incorporates resultsfrom the liability and asset models to compute the chancesof client success for each of the client’s goalsCOPYRIGHT 2009 to 2013 JACK PPAUL ACTUARY LLC
  71. 71. About Jack Paul I am a Fellow of the Society of Actuaries and a Member of theAmerican Academy of Actuaries I have three designations from the American College -Chartered Financial Consultant (ChFC), Chartered LifeUnderwriter (CLU) and Chartered Advisor for Senior Living(CASL) I have over thirty years of actuarial experience, most recently asSVP and Chief Actuary of a suburban Philadelphia life insurancecompany I have developed this product to help serve comprehensivefinancial plannersCOPYRIGHT 2009 to 2013 JACK PPAUL ACTUARY LLCJack Paul
  72. 72. Questions? Comments?COPYRIGHT 2009 to 2013 JACK PPAUL ACTUARY LLC

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