Download - Health costs for CPAs

Analyzing your Client's Healthcare Concerns in Retirement

For CPA's and Consultants

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COPYRIGHT 2014 JACK P PAUL ACTUARY LLC

March 2014

Health Care is one of your client’s biggest concerns…

• 79% of consumers are unable to accurately estimate health care costs in retirement

(Source: Nationwide Survey “Health Care Costs in Retirement.” Consumer study of 625 respondents - January 2012.)

• 45% of consumers want to talk to advisors about health care (Source: Helping Clients Plan for Healthcare Costs in Retirement, FA Strategy Guide, Merrill Lynch Wealth Management, Bank of America Corporation, (2010).)


Health Care and Advisors


Only 7% of advisors feel they are well-equipped for client retirement needs in the area of health care!

(Source: Retirement Readiness. It’s Crunch Time for Advisors Helping Boomers

Prepare for Retirement, RydexAdvisor Benchmarking, Inc., (March 2007).)

Health Care and Retirees

• What can you tell your clients, who are at or near retirement, about their future health care costs?

• Will the costs be very small?• Will they be larger but manageable?• Will the expenses of one spouse force the other spouse into poverty?• Will buying insurance solve the cost problem?

MANY QUESTIONS TO ANSWER

- It is impossible to boil the costs down to a single estimate!

- The best that can be done is to produce a probability distribution of the costs. Sometimes the probability distributions are described as “ranges of future costs”.

- The good news is that the probability distribution can be customized to each client!


PROBABILITY DISTRIBUTIONS


What are Probability Distributions?Probability distributions give the chances that the costs will be of various

levels.

For instance, there could be a 40% chance that there will be no costs, a 60% chance that the total costs will be less than $40,000, a 90% chance that the costs will be less than $200,000, and so on.

They will be expressed here as charts of probabilities and costs.


Customizing the Probability Distributions

• The probability distributions depend on many characteristics (of the client):o Ageo Mortality (the probability of each client living to various ages)o Morbidity (the probability that they will need long-term care or other health care)

• The mortality and morbidity of the client can be determined by the use of questionnaires.

• These questionnaires ask about aspects of the client to determine mortality and morbidity.

• There are simplified versions of the questionnaires if desired.

• As you’ll see, the levels of mortality and morbidity make a great difference in the range of future costs!


“The Smiths vs The Johnsons”

Probability Distributions


How Do Costs Look For Different Clients?

THE SMITHS THE JOHNSONSMALE & FEMALE AGE 65 65

CURRENT HEALTH STATUS VERY HEALTHY MODERATE HEALTH

Male Life Expectancy 20.2 years 14.3 years

Female Life Expectancy 23.8 years 16.4 years

Current Insurance (Long-Term Care) Insured at Preferred Class Insured at Standard Class

Chronic Conditions None Mr. Johnson has 2 chronic conditions

(High Blood Pressure and Arthritis)

Mrs. Johnson has 3 chronic conditions

(High Blood Pressure, Arthritis and Mild

Respiratory Disease)

Long-Term Care Cost Level Desired "Rich" (see note below) Average

(e.g. private room in nursinghome if ever needed)

OVERVIEW – 2 Couples both 65 Years Old

Probability DistributionsThe Smith’s and the Johnson’s

• Probability distributions (range of costs) for just long-term care

• These costs are computed based on:

• The ages at death are not fixed, but rather the life expectancies of Mr. and Mrs. Smith (or Mr. and Mrs. Johnson) are used to compute the probabilities of living to different ages.

• Long-term care can occur at different ages for different lengths of time at various levels of care.


The next slide shows a chart showing the amounts that must be set aside to fund the couple’s long-term care costs (e.g. the present value of long-term care costs).

The present values are calculated at 4%.

Present Value of Long-Term Care Costs

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

10% $015% $020% $4,00025% $9,00030% $18,00035% $28,00040% $40,00045% $55,00050% $69,00055% $89,00060% $109,00065% $131,00070% $161,00075% $194,00080% $243,00085% $319,00090% $443,00095% $689,00099% $1,261,000

99.50% $1,510,000

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

This chart shows that over 15% of the time, the clients will have no long-term care costs. In fact, over 50% of the time the costs seem manageable.

However, there is a significant chance that the Smiths will have to set aside over $100,000. There is a small chance that the Smiths will need a million dollars or more from their assets to cover their long-term care costs!

These numbers are present value numbers. The next slide shows the range of costs on a dollars to be spent basis.


THE SMITHS

Dollar Value of Long-Term Care Costs Over Their Lifetimes

Probability Total Dollar Costs Won’t Exceed:1% $05% $0

10% $015% $3,00020% $12,00025% $23,00030% $40,00035% $64,00040% $93,00045% $125,00050% $161,00055% $206,00060% $253,00065% $307,00070% $372,00075% $456,00080% $577,00085% $765,00090% $1,093,00095% $1,747,00099% $3,420,000

99.50% $4,151,000

Chart Displays the Probabilities that the Future Long-Term Care Costs of the Client Will Be at Various Levels (displayed before tax)

`

• These costs are much higher than the costs displayed in the previous slide, as there is no discounting for interest in this slide

• There is a significant chance that the Smiths will have to pay over $250,000 in their lifetimes. There is more than a 10% chance that the costs will be over a million dollars!

• Since present values are more important than ultimate dollar costs for planning purposes, that will be the focus for the rest of the presentation.

THE SMITHS


10% $015% $020% $4,00025% $9,00030% $18,00035% $28,00040% $40,00045% $55,00050% $69,00055% $89,00060% $109,00065% $131,00070% $161,00075% $194,00080% $243,00085% $319,00090% $443,00095% $689,00099% $1,261,000

99.50% $1,510,000

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

• Snapshot of the long-term care risk – both in terms of magnitude and variability.

• Customized to the Smiths, based on their longevity and morbidity.

• Later, we’ll look at what the addition of long-term care insurance does to the chart.

Present Value of Long-Term Care Costs

CORNERSTONE OF PLANNING FOR THEIR FUTURE

Next slide shows Present Value of the Johnson’s Long-Term Care Costs

THE SMITHS


10% $015% $020% $2,00025% $7,00030% $13,00035% $22,00040% $34,00045% $46,00050% $62,00055% $79,00060% $96,00065% $115,00070% $138,00075% $167,00080% $209,00085% $272,00090% $369,00095% $558,00099% $980,000

99.50% $1,124,000

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

`

Next slide compares the Smith’s and Johnson’s side by side.

Present Value for the Johnson’s

Present Value of Long-Term Care CostsTHE JOHNSONS

Probability Smiths Johnsons1% $0 $05% $0 $0

10% $0 $015% $0 $020% $4,000 $2,00025% $9,000 $7,00030% $18,000 $13,00035% $28,000 $22,00040% $40,000 $34,00045% $55,000 $46,00050% $69,000 $62,00055% $89,000 $79,00060% $109,000 $96,00065% $131,000 $115,00070% $161,000 $138,00075% $194,000 $167,00080% $243,000 $209,00085% $319,000 $272,00090% $443,000 $369,00095% $689,000 $558,00099% $1,261,000 $980,000

99.50% $1,510,000 $1,124,000

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

`

• The Smith’s numbers are higher in general. This is due to their significantly longer life expectancies, which overcomes the better morbidity of the Smiths.

• The numbers in the chart diverge significantly at the higher probability levels (the tail of the liabilities). At the 85% level, the present value of the Smith’s costs are over 17% higher than the Johnson’s costs. At the 95% level, the costs are over 23% higher.

• The average present value for the Smiths is $164,000 and for the Johnsons is $135,000 – a 21% difference!

Observations

Present Value of Long-Term Care CostsTHE SMITHS vs THE JOHNSONS

Customization is Important!Each Client is Different

Probability Smiths Johnsons1% $0 $05% $0 $0

10% $0 $015% $0 $020% $4,000 $2,00025% $9,000 $7,00030% $18,000 $13,00035% $28,000 $22,00040% $40,000 $34,00045% $55,000 $46,00050% $69,000 $62,00055% $89,000 $79,00060% $109,000 $96,00065% $131,000 $115,00070% $161,000 $138,00075% $194,000 $167,00080% $243,000 $209,00085% $319,000 $272,00090% $443,000 $369,00095% $689,000 $558,00099% $1,261,000 $980,000

99.50% $1,510,000 $1,124,000

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

• The costs can vary even more at the client level than between the Smiths and the Johnsons.

• The analysis should be based on the individuals and not general levels of costs!

• The costs are very dependent on:• The life expectancy of the clients.• The morbidity profile of the

clients.• The costs of the plan of care

chosen by the clients, which is partially dependent on where the clients live.

“The Smiths”

Insurance Policies


Impact of Insurance Policy on Costs

A policy with the following features is now assumed to be purchased on each life:

Five-year benefit period, shared benefit pool90 day elimination period$300 per day maximum benefit5% compound inflation riderPremium of $15,959 per year

Does the insurance policy make the costs less in dollar amount (a present value basis)?

Does the insurance policy make the costs less variable (on a present value basis)?


THE SMITHS

Probability Amount of Assets Set Aside Won’t Exceed:W/out Ins. With Ins.

1% $0 $103,0005% $0 $137,000

10% $0 $156,00015% $0 $169,00020% $4,000 $180,00025% $9,000 $188,00030% $18,000 $196,00035% $28,000 $204,00040% $40,000 $211,00045% $55,000 $218,00050% $69,000 $226,00055% $89,000 $235,00060% $109,000 $245,00065% $131,000 $256,00070% $161,000 $267,00075% $194,000 $281,00080% $243,000 $296,00085% $319,000 $314,00090% $443,000 $341,00095% $689,000 $384,00099% $1,261,000 $544,000

99.50% $1,510,000 $666,000

Chart Displays the Probabilities that the Future Long-Term Care Costs of the Smiths Will Be Met By Setting Aside Certain Levels of Assets (displayed before tax) , both without and with long-term care insurance• This chart shows that over 80% of the

time, the Smiths will pay more if they purchase insurance than if they don’t. However, the tail end of the liabilities are significantly less with the insurance purchase!

• There will always be costs with the insurance purchase due to the premiums due.

• There are other significant benefits with purchasing the long-term care policy.

• The costs shown do not assume the insurer will raise rates.

Present Value of Long-Term Care Costs with vs. without Insurance PolicyTHE SMITHS

Next slides address the issue of whether the insurance reduces the variability of the costs.

Probability Amount of Assets Set Aside Won’t Exceed:W/out Ins. With Ins.

1% $0 $103,0005% $0 $137,000

10% $0 $156,00015% $0 $169,00020% $4,000 $180,00025% $9,000 $188,00030% $18,000 $196,00035% $28,000 $204,00040% $40,000 $211,00045% $55,000 $218,00050% $69,000 $226,00055% $89,000 $235,00060% $109,000 $245,00065% $131,000 $256,00070% $161,000 $267,00075% $194,000 $281,00080% $243,000 $296,00085% $319,000 $314,00090% $443,000 $341,00095% $689,000 $384,00099% $1,261,000 $544,000

99.50% $1,510,000 $666,000

Chart Displays the Probabilities that the Future Long-Term Care Costs of the Smiths Will Be Met By Setting Aside Certain Levels of Assets (displayed before tax) , both without and with long-term care insurance

`

• Let’s examine the difference in costs between the 90% probability level and the 50% probability level as a proxy for the variability of the Smith’s long-term care costs.

• Without the insurance, the cost differential is $443,000 minus $69,000, or $374,000.

• With the insurance, the cost differential is $341,000 minus $226,000, or $115,000.

• So the variability is reduced, but not eliminated.

Will Insurance Purchase Reduce the Variability of Long-Term Care Costs?THE SMITHS

Can the variability be eliminated by purchasing an unlimited benefit policy? (see next slide)

Probability Amount of Assets Set Aside Won’t Exceed:

W/out Ins.With 5 yr

Ins. PolicyWith Lifetime Ins. Policy

50% $69,000 $226,000 $327,000

90% $443,000 $341,000 $445,000


• Without the insurance, the cost differential is $443,000 minus $69,000, or $374,000.

• With the five year benefit insurance, the cost differential is $341,000 minus $226,000, or $115,000.

• With the lifetime benefit insurance, the costs differential is $445,000 minus $327,000, or $118,000.

• So the variability is not materially changed and is still significant.

• The variability is due to the premiums, as the amounts that need to be paid vary directly with the lifespan of the Smiths.

Will Insurance Purchase Reduce the Variability of Long-Term Care Costs? (cont.)THE SMITHS

The Chart now includes a lifetime benefit policy

Probability Amount of Assets Set Aside Won’t Exceed:

W/out Ins.With 5 yr

Ins. PolicyWith Lifetime Ins. Policy

50% $69,000 $226,000 $327,00090% $443,000 $341,000 $445,000


`

• Although the variability can be reduced, the cost level with the insurance is generally higher (often much higher) than without the insurance. So there is a cost involved to reduce the variability!

• The next slide incorporates the risks of prescription drug and other health costs (copays, deductibles, etc.) into the picture. Let’s continue to focus on the Smiths.

Will Insurance Purchase Reduce the Variability of Long-Term Care Costs? (cont.)THE SMITHS

The Chart shows emphatically that you can’t just purchase a policy to make the long-term care risk go away.

Present Value of Long-Term Care, Prescription Drug and Other Health (Copays, Deductibles, etc.) Costs

Probability Amount of Assets Set Aside Won’t Exceed:1% $70,0005% $112,000

10% $139,00015% $160,00020% $179,00025% $195,00030% $214,00035% $231,00040% $249,00045% $269,00050% $291,00055% $314,00060% $342,00065% $371,00070% $407,00075% $449,00080% $514,00085% $593,00090% $737,00095% $1,023,00099% $1,690,000

99.50% $1,996,000

Chart Displays the Probabilities that the Future Total Health Care Costs of the Smiths Will Be Met By Setting Aside Certain Levels of Assets (displayed before tax)

No long-term care insurance is purchased.

The Smiths are both covered for Medicare Parts A, B and D (the original Part D coverage). It assumes no Medicare Supplement coverage.

• These costs are obviously very significant and require serious planning to address.

• The costs vary significantly by health status and longevity. One size does not fit all.

• Let’s next briefly look at the impact these costs have on not outliving assets.

THE SMITHS

Assumptions

Observations

A computation was made (as part of a full financial plan for this hypothetical couple) as to the probability that the Smiths would not outlive their assets. The “safe withdrawal rate”, as discussed in the literature, of 4% of the initial portfolio amount (increased each year by inflation) was used.

Incorporating the health care costs shown in this presentation, the probability of not outliving their assets was 51%.

Ignoring the health care costs shown in this presentation, with all other aspects of the plan the same, the probability of not outliving their assets was 92%.

It is clear that ignoring these costs makes a huge difference to the clients. The amount that the clients have available to spend (their standard of living) would be significantly overstated by ignoring these health costs.

DON’T DEPEND ON THE SAFE WITHDRAWAL RATES IN THE LITERATURE!!

How Costs Affect Probabilities of not Outliving AssetsTHE SMITHS


The impact is different for each client, and depends on a multitude of factors, including asset level, plan of care, insurance, investment, tax, estate and other strategies.

Implications of Health Care Costs in Retirement Planning

Almost all retirees are unable to accurately calculate the magnitude and range of health care costs facing them in retirement.

These costs could cause financial ruin and can’t be ignored.

Clients need to understand their options: Medicare/Medicare Advantage/Medicare Supplement Insurance Employer health plans available to the client Long term care strategies if long-term care is ever needed Strategies to maximize their retirement goals

Advisors have a golden opportunity to increase their worth to their clients, by being a resource to them on this critical issue!

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I WILL PAY YOU FOR 30 MINUTES OF YOUR TIME!


Jack P Paul Actuary, LLC is doing research on certain aspects of CPA’s practices. In exchange for your contributions, you will be compensated for 30 minutes of your time.

PLEASE E-MAIL [email protected] FOR MORE DETAILS.

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CPAs are invited to register with Jack P Paul Actuary, LLC on contact page at:http://www.jackpaulcasl.com/

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About Jack P. Paul Actuary, LLC

This presentation was prepared by Jack P. Paul Actuary LLC.

Jack P. Paul, President, is a Fellow of the Society of Actuaries and a Member of the American Academy of Actuaries, as well as a ChFC, CLU and CASL. He has over 30 years experience in the insurance and financial services industries.

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Download - Health costs for CPAs

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