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 month and 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 care 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 payments cease.

• Premiums are not paid during the elimination period.

• The clients currently have $40,000 that could be set aside for long-term care expenses.

• But if long-term care insurance is purchased, this same account 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 assisted 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 future value of assets saved for long-term care needs compared to future costs, should the couple plan to self-insure the need?