Case approach to financial planning

1. Ambra is age 50 and single. She is concerned about funding long-term care insurance costs in the future. Based on family history, she has determined the following.

  • she will likely need long-term care coverage beginning at age 78
  • she will need coverage for six years
  • long-term care costs in her area are currently $72,000 per year;
  • long-term care costs are increasing by 5% annually;
  • she can earn 7% on her savings and assets:
  • she currently earns $98,000 per year; and
  • she has saved $75,000 that she is willing to earmark for long-term care costs.

Use this information to answer the following questions:

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a. what is the future value cost of long-term care coverage when Ambra enters a nursing facility?

b. what is the total cost of coverage for six years whewn Ambra enters a nursing facility (present value of cost determined at age 78)?

c. how long will Ambra’s long-term care savings last when she enters a nursing facility?

d. Assume that Ambrsa has other property valued at $250,000. If she is willing to use this asset to help pay for long-term care costs, does she need long-term care insurance at this time?

2.Recently, a married couple requested that you assist them by writing a modular, or targeted long-term care financial plan. The clients both turned 54 this monthand are fairly wealthy but not rich. Specifically, they wanted to consider self-insuring for any long-term care costs. However, they do not know whether they have adequate assets to self-insure. Use the following client assumptions to answer their questions.

  • the current cost of an assisted living facility is $95 per day and the nursing care facility is $135 per day.
  • cost of care will increase at an annual effective rate of 6% throughout the time period. Assume cost increases occur annually.
  • both clients will simultaneously enter casre facilities at age 77, spend three years in assisted living and one year in nursing care, and die at age 81.
  • for simplicity, assume that all expenses, whether premium payments or direct costs, are to be paid at the end of each year.
  • the policy includes a waiver of premium provision. in other words, once the clients begin to receive benefits for a long-term care stay, premium amount cease.
  • premiums are not paid during the elimination period.
  • the clients current;y have $400,000 that could be set aside for long-term care expenses. But if long-term care insurance is purchased , this same amount would be used to pay for the insurance premiums.
  • the effective annual required rate of return on invested funds is 6.5%
  • for simplicity, assume that all months have 30 days

Use this information to answer the following questions:

a. How much will assited living care cost per year when the clients reach age 77?

b. How much will nursing care cost per year when the clients reach age 80?

c. what is the total present value need for one person at age 77?

d. given the futrue value of assets saved for long-term care needs compared to future costs, should the couple plan to self-insure the need?

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