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Insuring longevity risk and long-term care: Bequest, housing and liquidity

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

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 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 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.

Suggested Citation

  • Xu, Mengyi & Alonso-García, Jennifer & Sherris, Michael & Shao, Adam W., 2023. "Insuring longevity risk and long-term care: Bequest, housing and liquidity," Insurance: Mathematics and Economics, Elsevier, vol. 111(C), pages 121-141.
    • Handle: RePEc:eee:insuma:v:111:y:2023:i:c:p:121-141
    DOI: 10.1016/j.insmatheco.2023.03.004
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    More about this item

    Keywords

    Recursive utility; Housing; Life annuities; Long-term care insurance; Lifecycle model;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G52 - Financial Economics - - Household Finance - - - Insurance
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies

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