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The Role of the Personal Actuary

The Role of the Personal Actuary

There are many new career options available for actuaries. One that is gaining in notoriety is the personal actuary.

When an actuary consults on behalf of individuals, either directly or through indirect business-to-business situations as an intermediary, he or she is performing Personal Actuarial work. Actuaries are hired directly by individual clients and by business professionals to help with their clients, to incorporate life and health contingencies into evaluations that assist those individuals in numerous ways. This article attempts to explain the role that actuaries can and do undertake when serving individual needs.

The Personal Actuary Defined

A personal actuary is one who performs actuarial services for specific individuals. The client for these personal actuarial services may be the individual(s) or other parties who are working on programs involving the specific individual(s) and need the services of an actuary. The most direct forms of personal actuarial work will be on behalf of specific individuals and will, therefore, have their best interests in mind.

The foregoing definition and terminology, which was written by the Task Force on the Personal Actuary, has evolved over the last dozen or so years from the concept of "personal actuarial counseling" first presented in a paper by John M. Bragg, FSA, at the International Congress of Actuaries in Montreal in 1992. Mr. Bragg's recognition of the potential application of actuarial science to individual situations pioneered many of the ideas presented in this article.

Examples of Personal Actuarial Work

Actuarial work for individuals varies depending on the need of the client and the role of the actuary. Many actuaries who do not think of themselves as primarily personal actuaries will nevertheless find themselves performing personal actuarial services from time to time. The Bragg paper previously cited identifies broad areas of such services and discusses each in some detail. The services described in Bragg's paper are still appropriate and therefore the following discussion proceeds under several of the same headings.

Personal Evaluations

Examples of personal evaluations include the following:

Life Expectancy–All types of situations that call for the determination of life expectancy on the most realistic basis exist, and often require the careful evaluation of the effect on mortality of the medical history and current medical conditions of the subject individual. Best-estimate life expectancy calculations are a necessary ingredient to the proper evaluation of life income interest in a trust or estate, life settlements, etc. An article by Michael Frank in the Actuary of the Future section newsletter, October 2004, "Life Settlements ... Understanding the Facts and Myths of This Secondary Insurance Product," indicates that longer life expectancies typically result in lower life settlement transaction amounts. Actuaries are needed to incorporate various contingencies into life settlements as well as many similar financial calculations. An actuary truly understands the life expectancy calculation, how to select the assumptions, and how best to apply contingencies to obtain ultimate financial values.

Health Expectancy–A newer twist on life expectancy, the health expectancy breaks-out expected future lifetime into three components: skilled nursing, assisted living and healthy years. Additionally, instead of using only one life expectancy figure, actuaries can calculate annual probabilities, incorporating streams of payments to provide a better financial analysis that is not given by any other profession today. Clearly, these services can be important to financial planners, attorneys involved in evaluating the present value of a future stream of contingent payments (about which, the personal actuary may be called as an expert witness) and administrators of estates and trusts.

Personal Risk Management

This area involves assistance in the identification and quantification of risk, programs to reduce risk and programs to insure against risk. Examples of questions include:

  • Should I switch to my company's new cash balance retirement plan or accept their offer to be grandfathered under the old defined benefit plan?
  • Does my financial plan include the proper type of life insurance? If so, does the policy I have represent the best value today?
  • How do I determine how much life insurance I need and of what type?
  • How do I know if I need long-term care insurance? If I do, what kind of benefit period is most appropriate for my situation and how much coverage is needed?

Matters Involving Claims and Entitlement

To some extent this area overlaps the preceding two areas. It involves the proper and fair determination of the value of some kind of financial claim. Actuaries have been involved with evaluation of retirement options, structuring early retirement and golden parachute offers, valuing legal entitlements (personal injury, divorce, structured settlements, etc.) and assistance in accurate determination of Social Security benefits.

Investments

Actuaries possess unique skills to assist in structuring and/or evaluating various scenarios for projecting the adequacy of an individual's future income and net worth to support a given level of expenses (lifestyle). They are also well capable of recommending alternative asset allocation strategies to minimize the probability of "outliving one's assets." Asset allocation across broad classes of investments is often far more crucial to success than the actual specific investments. Using historic long-term perspectives, personal actuaries can be unusually well equipped to deal with such questions.

Taxes

While not holding ourselves up as professional tax advisors or experts, actuaries nevertheless are able to assist in clarifying such areas as estate and gift tax consequences for different financial plans, the deferred taxation of "qualified" plans and even the preparation of some tax returns.

These few paragraphs are by no means an exhaustive survey of the areas of personal actuarial services. They are meant to stimulate awareness and thinking of even more such opportunities. The role of the actuary in individual applications is growing by leaps and bounds. Applying actuarial science to evaluate a variety of many personal situations is becoming not only more common, but necessary to make informed decisions.

Some actuaries get involved in Personal Actuarial work by stumbling upon this entire field after retiring or suffering a job layoff, while others are interested in developing a part-time career on the side as they prepare for retirement. Some actuaries are working with individuals full-time, as financial advisors or in other areas, and do not realize that they can apply actuarial science to provide a competitive edge. It is not currently known how many actuaries are performing personal actuarial work, because a classification or specialty currently does not exist in order to be identified in our directory of memberships in our various professional associations. The Task Force on the Personal Actuary is collecting such data and also has prepared a Personal Actuary Guidebook, which applies to pension, casualty, life and health as well as financial actuaries. The Guidebook is available on the SOA's Web site, www.soa.org. It is hoped that by promoting an understanding of a few of the ideas in this article and being introduced to some of the tools available, more actuaries will consider Personal Actuarial work in the future.

In the near future, the Task Force on the Personal Actuary, in an effort supported by both The Actuary of the Future Section and the Small Consulting Firm Section, will send to all SOA members a listing of references for a more detailed look at Personal Actuarial issues. A personal actuary survey is underway and in the future there are plans for a webcast. For more information on Personal Actuaries, look up The Task Force on the Personal Actuary on the SOA's Web site. If you are working as a Personal Actuary, please notify Julie Young at the SOA. If you would like to get involved with the Task Force on the Personal Actuary, please contact Julie or anyone on the Task Force.

James C. Brooks, Jr., is owner of Brooks Financial Mgt., LLC and a consultant for Bragg Associates.

Teresa Russ Winer is actuary/owner of Chastain Financial Services.