Housing, Health, and Annuities

Abstract:     
Annuities, long-term care insurance (LTCI), and reverse mortgages appear to offer important consumption smoothing benefits to the elderly, yet private markets for these products are small. A prominent idea is to combine LTCI and annuities to alleviate both supply (selection) and demand (liquidity) problems in these markets. This paper shows that if consumers typically liquidate home equity only in the event of illness, then LTCI and annuities become substitutes and less attractive. The reason is that the marginal utility of wealth drops when an otherwise illiquid home is sold, an event correlated with the timing of benefits from both annuities and LTCI. Simulations confirm that without home equity loans, both LTCI and constant real annuities may be welfare destructive, particularly in combination.

Number of Pages in PDF File: 24

Keywords: Insurance, Housing, Aging

JEL Classification: G22, R21, J14

working papers series