PDRP PLUS DETAILED PRODUCT PRESENTATION

An Actuarial Analysis of Retirement Goals and Risks

A New Tool For Comprehensive Financial Planning Professionals

COPYRIGHT 2009 JACK P PAUL ACTUARY LLC

Probability Distributions for Retirement Planning

PDRP Plus

Developed by

Jack P Paul, FSA, MAAA, CLU, ChFC, CASL

President, Jack P Paul Actuary LLC

101 Mill Creek Road Suite C

Ardmore, PA 19003

610-649-2358

Website: [email protected]

Copyright 2009 Jack P Paul Actuary

mailto:[email protected]

This new tool is a Probability Distribution Of Your Client’s Major Unknown Expense Risks Faced at Retirement

Introduction

Long – term Care Costs Prescription Drugs Longevity

Which can be Combined with your Client’s

To Compute the Probabilities of Successfully Meeting the Client’s Goals, including having the Client’s Assets Last For Life.

Asset Portfolio Investment Strategy Living and Other Expenses (Planned Spending)

What can PDRP Plus do for you?

PDRP Plus can help you compute the chance that the client will meet his/her goals more accurately and comprehensively than is currently done by financial planning software.

PDRP Plus increases the knowledge given to your clients. BECAUSE OF THIS: PDRP Plus will allow you to attract more business, as it will give

you an advantage over other financial planners. PDRP Plus can bring in more income per client.

What is Currently Done in Financial Projections To Project the Chances of Meeting Clients’ Goals?

Traditional Financial Projections

Usually, projections are focused on living expenses. These expenses are generally fixed but increase with inflation and future events that are planned for (vacations, purchases, etc.)

The variability of long-term care expenses is ignored. These expenses are sometimes low or nil, but other times can be so large they can prevent a client from reaching his/her goals, or even lead to impoverishment in some cases

When long-term care expenses are brought into play, it is usually in the form of a fixed event, such as projecting, say, a two year stay in a nursing home starting at age 80. The implicit claim is that if the client can afford this nursing home stay, he/she should be able to meet his/her retirement goals; in fact, sometimes the client’s retirement strategies (spending, investment, insurance) are adjusted to meet the client’s goals assuming this long-term care event actually occurs. There is no attempt to figure out the probability of this happening, or to use more likely events occurring, or to incorporate a continuum of events happening with their corresponding probabilities. This can easily lead (as will be shown) to strategy recommendations that “miss the mark”

An evaluation of an insurance purchase is usually done assuming a claim occurs, ignoring the chances of that claim occurring

Expenses:

Traditional Financial Projections (cont)

Time Horizon:

The retirement planning time horizon is usually either: until the life expectancy of the client; or a fixed advanced age (say, age 95 for an age 65 client). This life expectancy of the client is based on general averages, and not on any evaluation of the client’s future mortality possibilities

Note, however, that recently, some software programs now allow a “randomization” of the client’s date of death. This allows the effects of mortality to enter into the computation of the client’s chances of meeting his goals. However, it is not customized to the mortality profile of the client; it is based on general averages

Prescription Drugs:

Prescription drugs, if modeled, are usually modeled based on the current prescription drug use (with inflation) and not on possible future increased use

Prescription drug use can cost a significant amount of money (even with Medicare Part D), and can have a major impact on the client’s goals


Monte Carlo Testing:

Asset “Monte Carlo” testing is often done on the client’s asset portfolio to see if the amount of assets, along with the investment strategy, will allow the client to meet his/her goals

This testing is done with one or two expense scenarios, not with a comprehensive analysis of the client’s long-term care, mortality and prescription drug risks


What are the implications of performing testing this way?

By not correctly analyzing the client’s long-term care, mortality and prescription drug risks, recommendations are made that miscalculate the chance of the client’s success in meeting his/her goals

If that chance is understated, the financial planner often recommends strategies to increase the chance of success. That would possibly unnecessarily require the client to cut back his/her spending in retirement, which would be a disservice to the client

If that chance is overstated, it would lead to some clients failing to have enough money to meet their goals, even though the recommendations of the financial plan were followed

These problems are addressed in this new product!

SMARTER PLANNING:

PDRP Plus

A Probability Distribution of Your Client’s Major Unknown Expense Risks


Long Term Care Costs and Prescription Drug Costs


Sample Chart of Client’s Projected Range of Long-Term Care Costs

Sample 65 year old single male who is insurable at standard rates for long-term care insurance.

He has chosen a plan of long-term care that costs well above the national average, should he need it.

Probability Amount of Assets Set Aside Won’t Exceed:1% 05% 0

10% 015% 020% 025% 030% 035% 040% 045% 3,00050% 5,00055% 11,00060% 19,00065% 30,00070% 42,00075% 58,00080% 80,00085% 114,00090% 160,00095% 238,00099% 462,000

99.50% 534,000

Chart displays the Probabilities that the Future Long-Term Care Costs of the Client Will Be Met By Setting Aside Certain Levels of Assets (displayed before tax)

Here is a sample graphic of the chart in the previous slide. The bottom line (X-axis) shows the chances out of 10,000 that the costs will be at or below the level of the blue line. For instance, for this client, there is, as you can see by the chart in the previous slide, (approximately) a 90% chance that the amount of assets need to provide future long-term costs will be no more than $160,000.

10 410 810 12101610201024102810321036104010441048105210561060106410681072107610801084108810921096100

100000

200000

300000

400000

500000

600000

700000

800000

900000

Series1


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:


Probability Total Dollar costs won't exceed:1% 05% 0

10% 015% 020% 025% 030% 035% 040% 045% 7,00050% 15,00055% 28,00060% 50,00065% 80,00070% 116,00075% 166,00080% 242,00085% 348,00090% 513,00095% 803,00099% 1,710,000

99.50% 2,006,000


Total dollar costs over the client’s lifetime

What Makes This Information about Long-Term Care Costs Unique?

The long-term care costs for the remaining lifetime of an insurable person can vary very widely, from zero to over a half a million dollars or more (on a present value basis).

Those costs are dependent on many things, including: The medical condition of the person The chances of needing long-term care The length of time long-term care is needed, and the location where services are received The chances of dying The level of comfort and care the person desires, and whether there are unpaid providers

available The rate of earnings of the client’s assets The rate of inflation, and The provisions and features of existing and future long-term care insurance that the person

owns or will own.

No where else are all these factors combined into one analysis to examine the range of costs, and (as you’ll see later) the effect of an insurance purchase on the range of costs.


This Information Is Customized To The ClientCLIENT PROFILE:

Appropriate for singles or couples - currently my product handles those 65 and over; soon the ages will be expanded to 55 and over

My product is currently suitable for insurable individuals; soon uninsurable individuals will be added

PLAN OF CARE:

A plan of care, in which, after discussions between the client and the financial planning professional, will identify the cost of care and the caretakers (i.e., actual home caretakers, assisted living/nursing home facilities, etc.) in the event home care, assisted living or nursing home care is needed. This will include a decision as to whether the spouse or other unpaid person will take care of the client before paid care is needed. Note that average costs can always be substituted if desired for the plan of care. The costs of this plan of care will be incorporated into the projection


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



MORBIDITY AND MORTALITY ASSESSMENTS A morbidity screener (a questionnaire, with optional telephone interview and attending

physician statements in certain cases) assigns the client to a level of morbidity. The questionnaire is completed and evaluated by either Jack P Paul Actuary LLC or an outside service

A mortality screener (a questionnaire) is used to assign the client to a level of mortality and a mortality table, which gives the average rate of a person dying each year, which is used to compute information for the projections. The questionnaire is completed and (sometimes) sent to an outside firm for evaluation. These mortality rates are expressed either in terms of the Relative Risk tables of the Society of Actuaries (modified by Jack P Paul Actuary LLC), or, in some cases, on general population mortality tables. The mortality levels are different depending on smoking status. A chart of the mortality table, as well as the table itself, are included in the report that is provided. This information is valuable, as it gives the client a perspective from which to view his financial plan

The levels of morbidity and mortality are combined to compute the average time a client can expect to be healthy, needing home care, in an assisted living facility and in a nursing home


For the sample case above, the client will spend, on average, 20.20 years in a healthy state, .85 years needing home care, .51 years in an assisted living facility and .46 years in a nursing home

Prescription drug use is based on having/obtaining one or more of six chronic conditions, along with the current levels of prescription drug costs. Additional costs are incurred with the chances of getting Alzheimer’s disease. The costs are adjusted if the client has a Medicare Part D type (or other) prescription drug plan


How Long-Term Care Costs are Affected by the Purchase of a Long-Term Care Insurance Policy

ProbabilityAmount of Assets Set Aside Won’t Exceed:

1% 15,0005% 34,000

10% 45,00015% 51,00020% 55,00025% 59,00030% 62,00035% 64,00040% 67,99045% 69,00050% 71,00055% 73,00060% 75,00065% 77,00070% 79,00075% 82,00080% 86,00085% 93,00090% 112,00095% 145,00099% 307,000

99.50% 370,000

The long-term care insurance policy:

Has a four-year benefit period

Has a daily benefit amount of $200/day

Is a comprehensive policy covering both home care (at 100%) as well as facility care

An inflation provision of 5% compound

An annual premium of $4,961 (paid monthly)


Amount of assets set aside will not exceed:

Probability:Without Insurance: With Insurance:

1% 0 15,0005% 0 34,000

10% 0 45,00015% 0 51,00020% 0 55,00025% 0 59,00030% 0 62,00035% 0 64,00040% 0 67,00045% 3,000 69,00050% 5,000 71,00055% 11,000 73,00060% 19,000 75,00065% 30,000 77,00070% 42,000 79,00075% 58,000 82,00080% 80,000 86,00085% 114,000 93,00090% 160,000 112,00095% 238,000 145,00099% 462,000 307,000

99.50% 534,000 370,000

Comparison of Long-Term Care Costs and Purchase of Long-Term Care Policy (cont.)

• As you can see from the chart, the insurance “blunts” the higher costs. For example, there is an 90% chance that the total long-term care costs without insurance will be no more than $160,000. With the insurance, this amount goes down to $112,000

• This “blunting” has a cost of premiums of $4,961 per year. In fact, for 81.14% of the time, the present value of long-term care costs with insurance will be higher than the costs without it. (This calculation will be included in the reports I produce)

• The average percent of premiums paid out in benefits, taking into account this client’s morbidity and mortality profiles and the personalized plan of care was 51.4%. That means that the insurance company kept 48.6% of the premiums for benefits, expenses and profit. (This can be interpreted as the company “loss ratio” – the higher the better for the client)


Combining the Probability Distribution with the Client’s:Asset Portfolio,Investment Strategy, andExpenses:

Computing the Probabilities of Successfully Meeting the Client’s Goals


The expenses, investment strategies, assets and other aspects of the client’s plan can be combined with the probability distributions computed to measure the probability of success of the client’s goals:

Having assets last throughout life Other goals (vacations, education, leaving a specified inheritance, etc.)

Includes the Client’s Assets lasting throughout life

How Does the Combining Take Place?

Exclusive software created by Jack P Paul Actuary LLC


PDRP Plus

How Does the Combining Take Place? (Cont.) PDRP Plus, to compute the probabilities of successfully meeting the client’s

goals, performs “Monte Carlo” testing on the client’s financial goals. PDRP Plus’s Monte Carlo testing involves simulations of the client’s future

financial and health outcomes. For each simulation, PDRP Plus steps through a possible way the client’s financial situation and health play out, month by month from the client’s current age until death. Some scenarios last for as little as one month; others can last 50 years or more. The simulation’s outcome is dependent on the probabilities of different financial and health outcomes occurring.

A simulation is considered successful for a goal if there is enough money to fund that goal at the proper time. For the goal of having enough money to last the client’s lifetime, the simulation counts that goal as successful if the amount of assets is above a certain client-selected tolerance at death. The number of scenarios that are successful, divided by the number of runs (often 12,500,000) gives the chance that the client will meet his/her goals.

The chances of success are computed by goal.

How Does the Combining Take Place? (Cont.) If the client’s chances for success are too low (as determined by the financial

planner and client):

Investment, insurance, long-term care plans and non-variable spending strategies can be modified and re-projected if any goals are not met; iterations can be performed until the client is satisfied (or the chances of success maximized)

PDRP Plus:

To measure the long-term care and prescription drug expenses, 25,000 random scenarios (Monte Carlo scenarios) are created

These 25,000 scenarios each give year by year expenses (net of insurance, where applicable) from the start age until death

The scenarios vary from each other significantly because:

Death can occur at any time

The need for long-term care can occur at any time

The setting for long term care varies

The amount of prescription drug cost varies


How Does the Combining Take Place? (Cont.)

These runs are combined with the other living expenses of the client. These expenses will increase each year by inflation. These include day-to-day living expenses and other expenses not associated with long-term care and prescription drug expense

Additional expenses are input for other goals the client may have, such as vacation or the purchase of new cars

500 Asset scenarios are created These 500 Asset scenarios are combined with the fixed expenses and the

25,000 liability scenarios, to produce a total of 12,500,000 “tests” of whether the client’s goals will be reached. Each test that reaches the client’s goals is marked successful

The number of the “tests” that are marked successful, divided by 12,500,000, gives the chances that the client will meet his/her goals (as previously stated, the number of scenarios can be changed if desired)


PDRP Plus (cont.):

How Does the Combining Take Place? (cont.)

Asset modeling in PDRP PLUS

PDRP Plus works best when the assets, investment strategy and disinvestment strategy of the client are each categorized into one or more of 12 fixed asset classes:

Money market Intermediate-term bonds Long-term bonds International Government bonds High-yield bonds Commodities Large-cap equity Mid-cap equity Small-cap equity International established equity International emerging equity REITs

Asset modeling in PDRP PLUS (Cont.) For each asset class, means and variances, along with the covariances between

asset classes, are used to project returns on each asset class for the simulations

The information is based on historical data for the asset classes, analyzed using the Capital Asset Pricing Model, and adjusted for future inflation expectations

These returns can be considered “average” returns for the each class in total. Within each class, some assets will perform better than the average and some worse than the average

The planner can input an additional amount to be added to the mean each year, without changing the variances or covariances, to reflect the additional returns that can be provided by the financial planner over and above the average, less the amount of charges by the planner for advice and administration

The planner can also “override” means, to grade from current values into historical values; Other overrides can be made if desired

Assets are also classified by tax-qualified status Additional information is obtained to compute taxes for the various asset

classes.

Other Modeling Considerations in PDRP PLUS Certain assets, such as health savings

account balances, insurance policies, and others are treated separately

Income of the client is incorporated into the projection

Liabilities of the client are incorporated into the projection

Comparison of a Traditional Projection and an Actuarial Analysis

For a given client (described on the next slide), here is a computation of the probabilities for meeting the goal of not running out of money before death.


Actuarial Analysis Traditional Projection

500 asset runs are performed

Each run with 25,000 liability runs

500 asset runs are performed

Each using same liability projection

Comparison of a Traditional Projection and an Actuarial Analysis

CASE STUDY/CLIENT: Age 65 male, single, no dependents

Standard, insurable LTC risk

Measured to have expected future mortality similar to the mortality underlying the RR100 Society of Actuaries Mortality Table (as modified by Jack P Paul Actuary LLC)

Has $400K of assets, all non-qualified

The assets were characterized into the nine asset classes mentioned earlier; only four asset classes were relevant to the client’s portfolio – Money market, Intermediate term bonds, Large Cap stocks and Small Cap stocks

Taxes are paid on the total gains each year, with carryforward of unused losses. All values are tracked at market, so no extra gain or loss occurs at asset sale

Plans to spend down his assets for living expenses at the rate of $1,000 per month in 2010, increasing after that by 3% per year (over and above income)

Goal: That his money will last the rest of the client’s life.


Comparison of a Traditional Projection and an Actuarial Analysis (cont.)



LTC costs based on customized plan of care

Prescription drugs – normalized to client’s current use

Morbidity and mortality profiles used

500 asset runs combined with 25,000 liability runs

Goal is to have assets last for life

Goal is measured by how many of the 12,500,000 runs have assets greater than zero when client dies

500 Asset runs using one set of spending

Done two ways: Assuming client lives to 85; assuming client lives to 95

LTC event: Client will need a two year stay in a nursing home with higher than average cost at age 80 (same cost level as was used in the actuarial analysis), then recover – the LTC scenario was set this way because it was felt that if there is enough money for the client with this scenario, the client will be in a good financial position.




Chance of meeting goal: 81%

Chance of meeting goal if living expenses are reduced by 10%: 86%

Chance of meeting goal if living expenses are reduced by 20%: 90%

The major chances of failure are more driven for this client by the high cost of the long-term plan of care chosen, as well as the range of future prescription drug costs, than by the level of living expenses

RESULTS

Chance of meeting goal: 68% if lives to age 85, 51% if lives to 95

Chance of meeting goal if living expenses are reduced by 10%: 78% if lives to age 85, 67% if lives to age 95

Chance of meeting goal if living expenses are reduced by 20%: 85% if lives to age 85, 79% if lives to age 95



Comments

The results of the traditional projection vary from a 51% chance of the client not outliving his money to an 85% chance

Which scenario is appropriate? What are the probabilities that the long-term care scenario will occur? Will the client live to 85? 95? Some other age?

Is recommending a 10% or 20% reduction in spending (along with the implications on the client’s lifestyle) a good idea, considering the scenario chosen may be unlikely? Is it a service to the client to base recommendations on scenarios that have an unknown likelihood of coming true?

Traditional scenarios don’t take into account the variability of prescription drug costs. How will the client’s finances be affected if he gets a series of chronic conditions with associated high prescription drug costs? What is the probability of that happening?

The actuarial analysis solves this problem. There is no need to devise a single or handful of scenarios as a criteria for whether the client’s goals will be met. It computes the chance of success (not outliving his money) taking into account the client’s projected expenses along with the risks of long-term care, prescription drugs and longevity



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.)


The actuarial analysis provides detailed, customized information allowing the financial planner and the client to:

Realistically set and measure the chances of achieving the client’s goals

Adjust the client’s investment, spending and insurance strategies, as well as the proposed plan of long-term care, to maximize the chances of achieving the client’s goals

Summary

PDRP Plus (Actuarial) Analysis vs Traditional Financial Projection

Traditional Projection

# of Asset Runs 500 (can be adjusted) 500 (can be adjusted within limits)

# of Liability Runs 25,000 Under 10

Total Number of Runs 12,500,000 Under 5000

Long Term Care Liabilities Customized Plan of care

Dynamically modeled using probability distribution

An event assumed to occur, oftentimes an expensive and unlikely one

Prescription Drug Costs Based on getting chronic conditions or Alzheimer’s disease

Either ignored or current level of spending used with inflation

Morbidity Dynamically modeled using probability distributionProbability of needing long-term care analyzed based on questionnairePrescription drug use based on the probability of incurring chronic conditions

Ignored

Mortality Mortality rates tied to Society of Actuaries’ or General population mortality tables

Customized, based on questionnaire (in some cases, based on analysis of additional medical information)

Projects varying times of death

Projections run until fixed age; sometimes this age is the "life expectancy" however obtained; sometimes this age is high, such as age 95 for a 65 year old

Not based on mortality profile of client

PDRP Plus

PDRP Plus (Actuarial) Analysis vs Traditional Financial Projection (cont.)


Living Expenses Based on information from traditional financial projection

Covered

Taxes Federal taken into account, state estimated

Sometimes comprehensive; sometimes pieces missing (such as deductibility of ltc and drug expense)

Goals Based on information from traditional financial projection

Covered

Investment /Disinvestment Strategies Based on information from traditional financial projection; categorization occurs into 9 asset classes

Covered

Insurance Strategies Long term care, Medicare part D, life insurance all taken into account

All projections are dynamic; the benefits are adjusted to the actual incidence by scenario

Iterations possible to compare various LTC insurance policies

Long term care is modeled for one event; Life insurance is modeled

Probability of Assumptions Used Taken into account Not specified or computed by software

PDRP Plus

PDRP Plus (Actuarial) Analysis vs Traditional Financial Projection (cont.)


Asset Information used in Stochastic Asset Testing

Each asset categorized into one or more asset classes. Historical means, variances and covariances used, adjusted for inflationMultivariate normal distribution used to project asset returnsFull override capability depending on client preferences – means, asset class methodology can be overridden

Results can be duplicated; full control over random number generator

Year by year output by scenario is available for close examination

Varies greatly by software provider:Could project just a single asset with a mean and standard deviation;Could project actual assets, but with negative returns artificially set to zero;Could project asset classes, with historical or projected means, variances, covariances;

Results generally vary each time projection run, even with exact same input; no control over random number generator

Year by year output can’t be examined

Setting Strategies Allows insurance, plan of care, spending, annuity and investment strategies to be analyzed based on customized morbidity and mortality profiles of client to determine the chances of meeting goals

Strategies not customized to morbidity or mortality profiles Chances of meeting goals only done on asset side, not on liability side

Cannot accurately measure effects of longevity annuities

PDRP Plus

Step by Step Process to Produce a Client Analysis


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


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


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)



Determining correct level of morbidity (cont.) A questionnaire will be provided section to determine the level of mortality of

the client

In cases where the client’s expected mortality is above a certain level, we may need additional information (including Attending Physician’s Statements) to determine the correct level of mortality. To obtain this information, we will obtain permission (through the financial planning professional) from the client.

In some cases, the questionnaire will be sent to an outside service for evaluation.



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



INFORMATION NEEDED TO COMPUTE PROBABILITIES OF SUCCESS

Information needed to compute probabilities of success The information needed on the previous slide generally the

information available as input into the base plan created by the financial planner for the client

Most of the information can be obtained by sending the client files (if run on financial planning software such as NaviPlan, Advice America, Moneyguide Pro or Money Tree); other information will be requested

If needed, a spreadsheet will be provided to input the required information

The ReportSECTIONS

Introduction The purpose of the report Explanation of report contents Profile of the client

Results of the mortality assessment Classification into mortality table Life expectancy – total and in various long-term care states Probability of living to certain ages

Results of the morbidity assessment

Classification into morbidity class

The Report (Cont.)

Customized Long-term Care Information Probability distribution of costs

With and without insurance

Customized Prescription Drug Cost Information Probability distribution of costs

With Medicare Part D, if applicable

Examination of Goals List of what goals were examined

Probability of meeting each goal

Probability of meeting all goals


The Report (cont.)

The Report (Cont.)

Changes in strategies, assumptions List of what scenario changes were examined

Results of changes

After feedback from the client and planner, a revised/final report will be issued

Methodology used

Assumptions used

Caveats about the process and report

A section about Jack P Paul Actuary LLC


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


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)


Assumptions (cont.)

The probability of getting one or more of six chronic conditions

The prescription costs associated with the chronic conditions

The probability of getting Alzheimer’s disease and its effect on prescription drug costs

The probability of death while not currently needing Long-term care

Cost of Care – input as described earlier

Economic assumptions – input as described earlier


Assumptions (cont.)


Insurance policy features Premium Benefit period Daily or monthly benefit amount Inflation provisions

Assumptions on Assets Means, standard deviations, covariances – for nine

asset classes; adjusted for future inflation expectations; overrides possible

Sources Of AssumptionsThe following sources were used: Society of Actuaries Intercompany Study on Long-Term Care 1984-2004 COLLECTION AND ANALYSIS OF DEMOGRAPHIC EXPERIENCE OF CONTINUING CARE

RETIREMENT COMMUNITY RESIDENTS by Barney and Bond Transactions of the Society of Actuaries 1995 - Long Term Care Insurance Valuation Methods Transactions of the Society of Actuaries 1988-1990 Report of the Long-Term Care Experience Committee

– 1985 National Nursing Home Survey Utilization Data Medicare.gov Agingstats.gov SSA.gov Society of Actuaries study on Transfer Rates Between Long Term Care Claim Settings Society of Actuaries Intercompany Life Insurance Mortality Study Society of Actuaries studies on 2008 Valuation Basic Table Report Notes from the 2004 Annual Society of Actuaries meeting Gilbert Guide is used where necessary Publicly available information from state insurance departments 2009 LTC Sourcebook Fi360 Asset – Allocation Optimizer input information


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


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


Methodology

I have produced a proprietary actuarial model with the assumptions listed above to produce 25,000 liability scenarios, which are then used to produce probability distributions of mortality as well as of long-term care and prescription drug costs

These probability distributions are used in the measuring of the chances of reaching various client goals related to retirement and other spending goals


Methodology (Cont.)

A “Monte Carlo” projection model was built which, given information about assets in the client’s portfolio, computes hypothetical annual returns for the portfolio for each of 500 runs. These hypothetical returns assume that the returns are from the multivariate normal distribution

A summary system was created that incorporates results from the liability and asset models to compute the chances of client success for each of the client’s goals


About Jack Paul

I am a Fellow of the Society of Actuaries and a Member of the American Academy of Actuaries

I have three designations from the American College - Chartered Financial Consultant (ChFC), Chartered Life Underwriter (CLU) and Chartered Advisor for Senior Living (CASL)

I have over thirty years of actuarial experience, most recently as SVP and Chief Actuary of Fidelity Mutual Life Insurance Company

I have been developing this product for over 18 months to help serve comprehensive financial planners


Jack Paul

Here Is A Proposal For You

I will be happy to apply my product to one of your clients at no charge

I would just like your feedback on the product as your client's report is produced

You of course would be in complete control of your client relationship; I would just be working with you or with you and your client together - never me and your client alone


Questions? Comments?


PDRP PLUS DETAILED PRODUCT PRESENTATION

Economy & Finance

Transcript of PDRP PLUS DETAILED PRODUCT PRESENTATION