PDRP PLUS DETAILED PRODUCT PRESENTATION

1. An Actuarial Analysis of Retirement Goals and Risks Probability Distributions for Retirement Planning A New Tool For Comprehensive Financial Planning Professionals COPYRIGHT 2009 JACK P PAUL ACTUARY LLC

2. 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 Jack P Paul Actuary

4. Prescription Drugs

6. Investment Strategy

7. Living and Other Expenses (Planned Spending)To Compute the Probabilities of Successfully Meeting the Client’s Goals, including having the Client’s Assets Last For Life.

8. 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.

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

11. 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

12. 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”

17. SMARTER PLANNING: These problems are addressed in this new product!

21. 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. COPYRIGHT 2009 JACK P PAUL ACTUARY LLC

22. 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: COPYRIGHT 2009 JACK P PAUL ACTUARY LLC

24. 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. COPYRIGHT 2009 JACK P PAUL ACTUARY LLC

25. This Information Is Customized To The Client CLIENT 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 COPYRIGHT 2009 JACK P PAUL ACTUARY LLC

26. 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 COPYRIGHT 2009 JACK P PAUL ACTUARY LLC

27. 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, 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

28. 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 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

30. Has a daily benefit amount of $200/day

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

32. An inflation provision of 5% compound

35. 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)

36. 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)COPYRIGHT 2009 JACK P PAUL ACTUARY LLC

39. Having assets last throughout life

42. 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.

43. 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)

44. How Does the Combining Take Place? (Cont.) 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 COPYRIGHT 2009 JACK P PAUL ACTUARY LLC

45. How Does the Combining Take Place? (cont.) PDRP Plus (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) COPYRIGHT 2009 JACK P PAUL ACTUARY LLC

46. 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

47. 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.

48. 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

50. Each run with 25,000 liability runs

51. 500 asset runs are performed

53. 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. COPYRIGHT 2009 JACK P PAUL ACTUARY LLC

55. Prescription drugs – normalized to client’s current use

56. Morbidity and mortality profiles used

57. 500 asset runs combined with 25,000 liability runs

58. Goal is to have assets last for life

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

60. 500 Asset runs using one set of spending

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

62. 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. COPYRIGHT 2009 JACK P PAUL ACTUARY LLC

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

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

66. 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

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

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

71. 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?

72. 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?

73. 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?

74. 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 longevityCOPYRIGHT 2009 JACK P PAUL ACTUARY LLC

76. Make adjustments to his planned investment strategy

77. Make adjustments to his planned future spending levels

78. Consider insurance strategies

79. Consider immediate or longevity annuities

80. Make adjustments to his customized plan of long-term care

81. 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 COPYRIGHT 2009 JACK P PAUL ACTUARY LLC

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

84. 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 goalsCOPYRIGHT 2009 JACK P PAUL ACTUARY LLC

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

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

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

89. Questionnaire provided to financial planner

90. Completion of questionnaire by financial planner, working with client

91. 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

92. When questionnaire is returned, portions sent to outside firms to produce mortality and morbidity profiles, if necessary

93. Initial report is prepared by Jack P Paul LLC; this will be approximately two weeks from the receipt of the questionnaire

94. Initial report is reviewed with financial planner and client; including initial asset/expense projections of client’s goals

95. 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

97. 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 COPYRIGHT 2009 JACK P PAUL ACTUARY LLC

98. 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.) COPYRIGHT 2009 JACK P PAUL ACTUARY LLC

99. Economic assumptions Interest rateto 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) Questionnaire(cont.) COPYRIGHT 2009 JACK P PAUL ACTUARY LLC

100. 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. Questionnaire(cont.) COPYRIGHT 2009 JACK P PAUL ACTUARY LLC

101. Questionnaire(cont.) INFORMATION NEEDED TO COMPUTE PROBABILITIES OF SUCCESS 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 COPYRIGHT 2009 JACK P PAUL ACTUARY LLC

102. 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

104. The purpose of the report

105. Explanation of report contents

106. Profile of the client

107. Results of the mortality assessment

108. Classification into mortality table

109. Life expectancy – total and in various long-term care states

110. Probability of living to certain ages

111. Results of the morbidity assessment

113. 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 COPYRIGHT 2009 JACK P PAUL ACTUARY LLC

114. 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 COPYRIGHT 2009 JACK P PAUL ACTUARY LLC

115. 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) COPYRIGHT 2009 JACK P PAUL ACTUARY LLC

116. 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 COPYRIGHT 2009 JACK P PAUL ACTUARY LLC

118. Benefit period

119. Daily or monthly benefit amount

121. Sources Of Assumptions The 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 COPYRIGHT 2009 JACK P PAUL ACTUARY LLC

122. 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 About This Product COPYRIGHT 2009 JACK P PAUL ACTUARY LLC

123. 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 COPYRIGHT 2009 JACK P PAUL ACTUARY LLC

124. 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 COPYRIGHT 2009 JACK P PAUL ACTUARY LLC

125. 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 COPYRIGHT 2009 JACK P PAUL ACTUARY LLC

126. 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 COPYRIGHT 2009 JACK P PAUL ACTUARY LLC

127. 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 COPYRIGHT 2009 JACK P PAUL ACTUARY LLC

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