Converting Retirement Benefit into a Life Care Annuity with Graded Benefits: How Costly Would It Actually Be?

Scandinavian Actuarial Journal, November 2016, DOI: 10.1080/03461238.2016.1258370

30 Pages Posted: 1 Jul 2016 Last revised: 6 Mar 2017

See all articles by Javier Pla-Porcel

Javier Pla-Porcel

SOS Seguros y Reaseguros, S.A.

Manuel Ventura-Marco

University of Valencia - Faculty of Economics

Carlos Vidal-Meliá

University of Valencia - Department of Financial Economics

Date Written: November 5, 2016

Abstract

This paper deals with life care annuities, i.e. bundled products comprising a life annuity and long-term care insurance. It aims to assess the cost of converting retirement benefit into a life care annuity with graded benefits using a pre-existing public pay-as-you-go pension scheme. With this objective in mind, we present an actuarial method based on array calculus for valuing this type of life care annuity. The health dynamics of the annuitant rely on a reversible illness-death multistate framework. The paper contains a numerical example in which mortality and disability assumptions are based on data from the USA and Australia, although this should be viewed simply as an illustration. In addition, in order to check the coherence of these data, we compute life expectancy for both healthy and dependent persons, and then for dependent persons in each of the states of dependence. The effect of ruling out the recovery assumption on the annuity's cost is also assessed. The analysis provides valuable insights into how much it would cost to introduce these annuities and enables us to make some policy recommendations to help ensure that this combined pension scheme has a good actuarial design. If the data used were the real data, it would be no exaggeration to say that embedding long-term care coverage into the retirement system in the USA might not be very costly, whereas for Australia the opposite would be true.

Keywords: Life Care Annuities, Long-Term Care Insurance, Multistate model, Retirement

JEL Classification: G22, H55, I13, J14, J26

Suggested Citation

Pla-Porcel, Javier and Ventura-Marco, Manuel and Vidal-Meliá, Carlos, Converting Retirement Benefit into a Life Care Annuity with Graded Benefits: How Costly Would It Actually Be? (November 5, 2016). Scandinavian Actuarial Journal, November 2016, DOI: 10.1080/03461238.2016.1258370, Available at SSRN: https://ssrn.com/abstract=2801651 or http://dx.doi.org/10.2139/ssrn.2801651

Javier Pla-Porcel

SOS Seguros y Reaseguros, S.A. ( email )

Calle Ribera del Loira 4-6
Madrid, 28042
Spain

Manuel Ventura-Marco

University of Valencia - Faculty of Economics ( email )

Valencia, E-46022
Spain

Carlos Vidal-Meliá (Contact Author)

University of Valencia - Department of Financial Economics ( email )

Avda. del Tarongers, s/n
46022 Valencia
Spain

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