Health costs for CPAs

Analyzing your Client's Healthcare
Concerns in Retirement
For CPA's and Consultants
PDRP Plus
PDRP Plus
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 Age
o 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
D i f f e r e n t
C l i e n t s ?
THE SMITHS THE JOHNSONS
MALE & 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 nursing
home if ever needed)
OVERVIEW – 2 Couples both 65 Years Old

Probability Distributions
The 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% $0
5% $0
10% $0
15% $0
20% $4,000
25% $9,000
30% $18,000
35% $28,000
40% $40,000
45% $55,000
50% $69,000
55% $89,000
60% $109,000
65% $131,000
70% $161,000
75% $194,000
80% $243,000
85% $319,000
90% $443,000
95% $689,000
99% $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% $0
5% $0
10% $0
15% $3,000
20% $12,000
25% $23,000
30% $40,000
35% $64,000
40% $93,000
45% $125,000
50% $161,000
55% $206,000
60% $253,000
65% $307,000
70% $372,000
75% $456,000
80% $577,000
85% $765,000
90% $1,093,000
95% $1,747,000
99% $3,420,000
99.50% $4,151,000
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

1% $0
5% $0
10% $0
15% $0
20% $4,000
25% $9,000
30% $18,000
35% $28,000
40% $40,000
45% $55,000
50% $69,000
55% $89,000
60% $109,000
65% $131,000
70% $161,000
75% $194,000
80% $243,000
85% $319,000
90% $443,000
95% $689,000
99% $1,261,000
99.50% $1,510,000
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.
Costs
CORNERSTONE OF PLANNING
FOR THEIR FUTURE
Next slide shows Present Value of the
Johnson’s Long-Term Care Costs
THE SMITHS

1% $0
5% $0
10% $0
15% $0
20% $2,000
25% $7,000
30% $13,000
35% $22,000
40% $34,000
45% $46,000
50% $62,000
55% $79,000
60% $96,000
65% $115,000
70% $138,000
75% $167,000
80% $209,000
85% $272,000
90% $369,000
95% $558,000
99% $980,000
99.50% $1,124,000
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
CostsTHE JOHNSONS

Probability Smiths Johnsons
1% $0 $0
5% $0 $0
10% $0 $0
15% $0 $0
20% $4,000 $2,000
25% $9,000 $7,000
30% $18,000 $13,000
35% $28,000 $22,000
40% $40,000 $34,000
45% $55,000 $46,000
50% $69,000 $62,000
55% $89,000 $79,000
60% $109,000 $96,000
65% $131,000 $115,000
70% $161,000 $138,000
75% $194,000 $167,000
80% $243,000 $209,000
85% $319,000 $272,000
90% $443,000 $369,000
95% $689,000 $558,000
99% $1,261,000 $980,000
99.50% $1,510,000 $1,124,000
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
CostsTHE SMITHS vs THE JOHNSONS

Customization is Important!
Each Client is Different
Probability Smiths Johnsons
1% $0 $0
5% $0 $0
10% $0 $0
15% $0 $0
20% $4,000 $2,000
25% $9,000 $7,000
30% $18,000 $13,000
35% $28,000 $22,000
40% $40,000 $34,000
45% $55,000 $46,000
50% $69,000 $62,000
55% $89,000 $79,000
60% $109,000 $96,000
65% $131,000 $115,000
70% $161,000 $138,000
75% $194,000 $167,000
80% $243,000 $209,000
85% $319,000 $272,000
90% $443,000 $369,000
95% $689,000 $558,000
99% $1,261,000 $980,000
99.50% $1,510,000 $1,124,000
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 pool
90 day elimination period
$300 per day maximum benefit
5% compound inflation rider
Premium 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

W/out Ins. With Ins.
1% $0 $103,000
5% $0 $137,000
10% $0 $156,000
15% $0 $169,000
20% $4,000 $180,000
25% $9,000 $188,000
30% $18,000 $196,000
35% $28,000 $204,000
40% $40,000 $211,000
45% $55,000 $218,000
50% $69,000 $226,000
55% $89,000 $235,000
60% $109,000 $245,000
65% $131,000 $256,000
70% $161,000 $267,000
75% $194,000 $281,000
80% $243,000 $296,000
85% $319,000 $314,000
90% $443,000 $341,000
95% $689,000 $384,000
99% $1,261,000 $544,000
99.50% $1,510,000 $666,000
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 Policy
THE SMITHS
Next slides address the issue of
whether the insurance reduces the
variability of the costs.

W/out Ins. With Ins.
1% $0 $103,000
5% $0 $137,000
10% $0 $156,000
15% $0 $169,000
20% $4,000 $180,000
25% $9,000 $188,000
30% $18,000 $196,000
35% $28,000 $204,000
40% $40,000 $211,000
45% $55,000 $218,000
50% $69,000 $226,000
55% $89,000 $235,000
60% $109,000 $245,000
65% $131,000 $256,000
70% $161,000 $267,000
75% $194,000 $281,000
80% $243,000 $296,000
85% $319,000 $314,000
90% $443,000 $341,000
95% $689,000 $384,000
99% $1,261,000 $544,000
99.50% $1,510,000 $666,000
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
$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)

W/out Ins.
With 5 yr
Ins. Policy
With Lifetime
Ins. Policy
50% $69,000 $226,000 $327,000
90% $443,000 $341,000 $445,000
• Without the insurance, the cost
$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.
Variability of Long-Term Care Costs? (cont.)
THE SMITHS
The Chart now includes a lifetime
benefit policy

W/out Ins.
With 5 yr
Ins. Policy
With Lifetime
Ins. Policy
50% $69,000 $226,000 $327,000
90% $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.
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
1% $70,000
5% $112,000
10% $139,000
15% $160,000
20% $179,000
25% $195,000
30% $214,000
35% $231,000
40% $249,000
45% $269,000
50% $291,000
55% $314,000
60% $342,000
65% $371,000
70% $407,000
75% $449,000
80% $514,000
85% $593,000
90% $737,000
95% $1,023,000
99% $1,690,000
99.50% $1,996,000
Chart Displays the Probabilities that the Future Total Health Care Costs of
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!

Exceptional Software for Unrivaled
Results
• CPAs will have the opportunity to use this powerful, unique software!
• A “hands-on” version is coming in June!
• CPAs will be entitled to a special discount to lease this one-of-a-kind
system!

Here Is A Proposal For
You
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 JACK@JACKPAULCASL.COM FOR MORE DETAILS.

And Regi st er f or speci al Of f er s!
CPAs are invited to register with Jack P Paul Actuary, LLC on contact
page at:
http://www.jackpaulcasl.com/
• Information on upcoming webinars (for CE credit)
• Ask Jack your questions about health care costs
• Be offered special discounts on services from Jack P Paul Actuary LLC
(mention “Sullivan” for special pricing and discounts)
Including an extraordinary offer on
a full comprehensive plan offered
to one of your clients!

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.
Jack@Jackpaulcasl.com
www.jackpaulcasl.com

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