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

An Actuarial Analysis of
Retirement Goals and Risks
A Tool For Financial
Planning Professionals
COPYRIGHT 2009 to 2013 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: JackPaulCASL.com
Jack@Jackpaulcasl.com
Copyright 2009 to 2013 Jack P Paul Actuary

This new tool is a Probability Distribution Of Your Client’s
Major Unknown Expense Risks Faced at Retirement
Introduction
 Health Care Costs
 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, Annuity and Insurance Strategies
 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.
 PDRP Plus can validate prospective investment allocations and
compare the chances of success with varying investment
allocations.
 BECAUSE OF THIS:
 PDRP Plus will allow you to attract more business and assets
under management, 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 an impact on the client’s goals

Regular Health Costs:
 There is wide variation in modeling health costs. Often the premiums for Medicare
Part B are used by themselves. Sometimes Medicare Supplement, (also known as
Medigap) insurance is assumed to be purchased and the premiums for that are
included. 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 deductibles
each year are almost always ignored in modeling.
 No analysis is usually done to determine whether a Medicare Supplement Plan is a
cost-effective option for the client. Whether it is or not depends on the health of the
client. 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 will
require surcharges to all new beneficiaries starting in 2017 who purchase
Medicare Supplement Plan F.

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 health care, long-term care, mortality and
prescription drug risks
 Note that a single level investment return assumption is still very common in
traditional financial projections

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 that
use miscalculated chances 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 product!
SMARTER PLANNING:
PDRP Plus

A Probability Distribution of Your
Client’s Major Unknown Expense Risks
PAUL ACTUARY LLC
Health Care, Long Term Care
and Prescription Drug Costs

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% 0
5% 0
10% 0
15% 0
20% 0
25% 0
30% 0
35% 0
40% 0
45% 3,000
50% 5,000
55% 11,000
60% 19,000
65% 30,000
70% 42,000
75% 58,000
80% 80,000
85% 114,000
90% 160,000
95% 238,000
99% 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.
0
100000
200000
300000
400000
500000
600000
700000
800000
900000
1 501 1001 1501 2001 2501 3001 3501 4001 4501 5001 5501 6001 6501 7001 7501 8001 8501 9001 9501
Series1
PAUL ACTUARY LLC

 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:
PAUL ACTUARY LLC

Probability Total Dollar costs won't exceed:
1% 0
5% 0
10% 0
15% 0
20% 0
25% 0
30% 0
35% 0
40% 0
45% 7,000
50% 15,000
55% 28,000
60% 50,000
65% 80,000
70% 116,000
75% 166,000
80% 242,000
85% 348,000
90% 513,000
95% 803,000
99% 1,710,000
99.50% 2,006,000
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 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 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.
PAUL ACTUARY LLC

This Information Is Customized
To The Client
CLIENT 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 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
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
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, in terms of 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 eight 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. The eight chronic conditions are
Alzheimer’s, arthritis, cancer, stroke, respiratory, hypertension, heart disease and diabetes.
The information on the government website www.agingstats.gov was used to produce
probabilities of obtaining these chronic conditions.

PAUL ACTUARY LLC
How Long-Term Care Costs are Affected by the Purchase of
a Long-Term Care Insurance Policy
Probability
Amount of Assets Set Aside Won’t
Exceed:
1% 15,000
5% 34,000
10% 45,000
15% 51,000
20% 55,000
25% 59,000
30% 62,000
35% 64,000
40% 67,990
45% 69,000
50% 71,000
55% 73,000
60% 75,000
65% 77,000
70% 79,000
75% 82,000
80% 86,000
85% 93,000
90% 112,000
95% 145,000
99% 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)

PAUL ACTUARY LLC
Amount of assets set aside will not
exceed:
Probability:
Without
Insurance: With Insurance:
1% 0 15,000
5% 0 34,000
10% 0 45,000
15% 0 51,000
20% 0 55,000
25% 0 59,000
30% 0 62,000
35% 0 64,000
40% 0 67,000
45% 3,000 69,000
50% 5,000 71,000
55% 11,000 73,000
60% 19,000 75,000
65% 30,000 77,000
70% 42,000 79,000
75% 58,000 82,000
80% 80,000 86,000
85% 114,000 93,000
90% 160,000 112,000
95% 238,000 145,000
99% 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)

The Big Advantage of LTC Insurance:
 A client can choose to purchase or not
purchase 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 paid
more for their long-term care costs if they had
bought the insurance. So 18.86% of the time
the client will save money if they had bought
the insurance…

The Big Advantage of LTC Insurance:
 The advantage is in the amounts
over/underpaid:
 Again, on a present value basis:
 If they buy the insurance, the amount
overpaid will be $70,000 or less
 BUT – if they don’t buy the insurance, the
amount overpaid could be more than
$230,000!
 This information will be customized to the
client, and is available nowhere else!

Regular Health Care and
Prescription Drug Costs
 Probability distributions are created for these
important costs as well!
 The costs of all three are displayed for the
client:
 Separately
 Combined
 If the client is a couple, the costs are displayed
separately for each member of the couple and
then displayed for both members together

PAUL ACTUARY LLC
Combining the Probability
Distribution with the Client’s:
Asset Portfolio,
Investment Strategy, and
Expenses:

Computing the Probabilities of Successfully Meeting the Client’s Goals
PAUL ACTUARY LLC
 The expenses, annuity and insurance purchases, 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
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 plays 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 25,000,000)
gives the chance that the client will meet his/her goals.
 The chances of success are computed by goal.

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 health care cost varies
 The amount of prescription drug cost varies
PAUL ACTUARY LLC
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
 1,000 Asset scenarios are created
 These 1,000 Asset scenarios are combined with the fixed expenses and the
25,000 liability scenarios, to produce a total of 25,000,000 “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 25,000,000,
gives the chances that the client will meet his/her goals
PAUL ACTUARY LLC
PDRP Plus (cont.):
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
annuity contracts are incorporated into the
projection
 Income of the client is incorporated into the
projection
 Liabilities of the client are incorporated into
the projection

Insurance and Annuity Modeling
in PDRP PLUS
PDRP Plus accommodates a wide variety of
insurance and annuity products:
 Insurance
 Permanent
 Term
 Universal Life
Interest rates are dynamic and based on the
investment scenario
Estate plan handling of insurance is duplicated
in PDRP Plus.

Insurance and Annuity Modeling
in PDRP PLUS (Cont.)
 Annuities
 Deferred
 Immediate
 DIA/Longevity
 Structured Settlements
Interest rates are dynamic and based on the
investment scenario
Estate plan handling of annuities is duplicated in
PDRP Plus
Guaranteed Withdrawal benefits accommodated
Extra withdrawal privileges accommodated (for
example, when client is on LTC)

Reverse Mortgages
 PDRP PLUS can incorporate reverse
mortgages into the projection.
 Different reverse mortgage strategies can be
analyzed to maximize their benefits to the
client:
 Using at outset
 Using when other assets are spent

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.
PAUL ACTUARY LLC
Actuarial 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

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 12 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 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.
PAUL ACTUARY LLC

Comparison of a Traditional Projection and an Actuarial
Analysis (cont.)
PAUL ACTUARY LLC
 LTC costs based on customized plan of care
 Prescription drugs – normalized to client’s current
use
 Health care costs – normalized to client’s health and
insurance 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 25,000,000
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.)
PAUL ACTUARY LLC
 Chance of meeting goal: 81%
 Chance of meeting goal if living expenses
are reduced by 10%: 86%
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 health care and
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
are reduced by 10%: 78% if lives to age
85, 67% if lives to age 95
are reduced by 20%: 85% if lives to age
85, 79% if lives to age 95

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 health care and
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, health care
costs, prescription drugs and longevity

PAUL ACTUARY LLC
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.)
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, annuity 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 1000 (can be adjusted) 1000 (can be adjusted within limits)
# of Liability Runs 25,000 Under 10
Total Number of Runs 25,000,000 Under 10,000
Long Term Care Liabilities Customized Plan of care
Dynamically modeled using
An event assumed to occur,
oftentimes an expensive and unlikely
one
Health Care and Prescription Drug
Costs
Based on current and possible future
chronic conditions
Either ignored or current level of
spending used with inflation
Morbidity Dynamically modeled using
Probability of needing long-term care
analyzed based on questionnaire
Health care costs and prescription
drug use based in part 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.)
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 health care expense)
Goals Based on information from traditional
financial projection
Covered
Investment /Disinvestment Strategies Based on information from traditional
financial projection; categorization
occurs into 12 asset classes
Covered
Insurance/Annuity Strategies Long term care, Medicare part D, life
insurance, SPIA, DIAs all taken into
account as specified
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;
Annuities 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.)
Asset Information used in Stochastic
Asset Testing
Each asset categorized into one or
more asset classes.
Historical means, variances and
covariances used, adjusted for
inflation
Multivariate normal distribution used
to project asset returns
Full 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
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
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
 Medicare Supplement Insurance
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)
PAUL ACTUARY LLC

 Determining correct level of mortality
 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.
PAUL ACTUARY LLC

 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
PAUL ACTUARY LLC
INFORMATION NEEDED TO COMPUTE PROBABILITIES OF
SUCCESS

Information needed to compute
probabilities of success
 Much of the information needed on the previous slide is
generally available as it was used by 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, spreadsheets will be provided to input the required
information

The Report
SECTIONS
 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
 With Medicare Part D, if applicable
 Customized Regular Health Care Cost Information
 With Medicare Supplement insurance, if applicable
PAUL ACTUARY LLC
The Report (cont.)

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 goals
PAUL ACTUARY LLC
The Report (cont.)

The Report (Cont.)
 Strategies, assumptions
 List of what scenarios were examined
 Results of the various scenarios
 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
PAUL ACTUARY LLC
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
PAUL ACTUARY LLC

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)
PAUL ACTUARY LLC

Assumptions (cont.)
Also…
 The probability of getting one or more chronic conditions, including
Alzheimer’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 earlier
PAUL ACTUARY LLC

Assumptions (cont.)
PAUL ACTUARY LLC
Insurance and annuity features
 Premium
 Benefit period
 Daily or monthly benefit amount
 Inflation provisions
For annuities
 Amount of periodic benefit
 Benefit start date and period
 Daily or monthly benefit amount
 Inflation provisions, additional pmt triggers

Assumptions (cont.)
Assumptions concerning Assets
Means, standard deviations, covariances – for
twelve asset classes; adjusted for future inflation
expectations; overrides allowed

Sources Of Assumptions
The 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 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
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
PAUL ACTUARY LLC

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
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 health care, 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
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
1000 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
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 a suburban Philadelphia life insurance
company
 I have developed this product to help serve comprehensive
financial planners
PAUL ACTUARY LLC
Jack Paul

Questions? Comments?
PAUL ACTUARY LLC

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