Longevity Risk and Long-Term Care: Annuities, Long Term Care Insurance, Bequest, Housing and Liquidity

By Mengyi Xu, Jennifer Alonso-García, Michael Sherris, and Adam W. Shao

Research Overview

We study the impact of housing wealth and individual preferences on demand for annuities and long-term care insurance (LTCI). We build a multistate life-cycle model that includes longevity risk and health shocks. The preference is represented by a recursive utility function that separates risk aversion and elasticity of intertemporal substitution (EIS). When health shocks are considered, a higher level of risk aversion lowers the annuity demand, whereas a lower level of the EIS has the opposite effect. The impact diminishes with a weaker bequest motive, more liquid wealth, access to LTCI, or presence of home equity, all of which increase the demand for annuities. Annuity demand increases more significantly in the presence of home equity when LTCI is not offered in the market. The presence of home equity has a crowding-out effect on LTCI demand, and the effect is strengthened by a lack of bequest motives or a lower degree of risk aversion. The cash poor but asset rich may demand more LTCI coverage than their renter counterparts to preserve bequests. When both life annuities and LTCI are available, we find that the product demand is robust to changes in risk aversion and the EIS, providing insights into product designs that bundle annuities and LTCI.

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About the Authors

Mengyi Xu is with the Department of Statistics and Department of Mathematics, Purdue University; and the Australian Research Council Centre of Excellence in Population Ageing Research, UNSW Sydney, Australia (CEPAR).

Jennifer Alonso-García is with the Université Libre de Bruxelles, Brussels, Belgium; and CEPAR.

Michael Sherris is with the School of Risk and Actuarial Studies, UNSW Business School, Sydney, Australia; and CEPAR.

Adam W. Shao is with SCOR Global Life, Singapore; and CEPAR.

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