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

57 Pages Posted: 14 Mar 2022

See all articles by Mengyi Xu

Mengyi Xu

Purdue University; University of New South Wales (UNSW) - ARC Centre of Excellence in Population Ageing Research (CEPAR)

Jennifer Alonso-García

Université Libre de Bruxelles (ULB) - Department of Mathematics; Netspar

Michael Sherris

University of New South Wales - ARC Centre of Excellence in Population Ageing Research and School of Risk and Actuarial Studies; UNSW Business School

Adam W. Shao

affiliation not provided to SSRN

Abstract

We study the impact of housing wealth and individual preferences on demand for annuities and long-term care insurance (LTCI). We build a multi-state lifecycle 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, while a lower level of the EIS has the opposite effect. The impact diminishes with a weaker bequest motive, more liquid wealth, or access to LTCI, all of which increase the demand for annuities. The presence of home equity can enhance annuity demand, but the enhancement is marginal when the LTCI is available. 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 the 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.í

Keywords: Recursive utility, Housing, Life annuities, Long-term care insurance, Lifecycle model

Suggested Citation

Xu, Mengyi and Alonso-García, Jennifer and Sherris, Michael and Shao, Adam W., Insuring Longevity Risk and Long-Term Care: Bequest, Housing and Liquidity. Available at SSRN: https://ssrn.com/abstract=4057404 or http://dx.doi.org/10.2139/ssrn.4057404

Mengyi Xu (Contact Author)

Purdue University ( email )

610 Purdue Mall
West Lafayette, IN 47907
United States

University of New South Wales (UNSW) - ARC Centre of Excellence in Population Ageing Research (CEPAR) ( email )

Level 6, Central Lobby (enter via East Lobby)
Australian School of Business Building
Sydney, New South Wales NSW 2052
Australia

Jennifer Alonso-García

Université Libre de Bruxelles (ULB) - Department of Mathematics ( email )

Brussels
Belgium

Netspar ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Michael Sherris

University of New South Wales - ARC Centre of Excellence in Population Ageing Research and School of Risk and Actuarial Studies ( email )

UNSW Business School
Risk and Actuarial Studies
Sydney, NSW 2052
Australia
+61 2 9385 2333 (Phone)
+61 2 9385 1883 (Fax)

HOME PAGE: http://www.asb.unsw.edu.au/schools/Pages/MichaelSherris.aspx

UNSW Business School ( email )

Sydney, NSW 2052
Australia

Adam W. Shao

affiliation not provided to SSRN ( email )

No Address Available

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