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Integrating long-term care insurance purchase decisions with saving and investment for retirement

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  • Gupta, Aparna
  • Li, Lepeng

Abstract

Risk related to long-term care (LTC) is high for the elderly. Planning for LTC is now regarded as the [`]third leg' of retirement planning. In this paper, planning for LTC is integrated with saving and investment decisions for an integrated approach to retirement planning. Optimal LTC insurance purchase decisions are obtained by developing a trade-off between post-retirement LTC costs and LTC insurance premiums paid and coverage received. Integrating insurance purchase with wealth evolution, consisting of saving and investment decisions, allows addressing affordability issues. Two-way branching models are used for the stochastic health events and asset returns. The problem, formulated as a nonlinearly constrained mixed-integer optimization problem, is solved using a heuristic. Sensitivity analyses are performed for initial health and wealth status. Some important aspects of an individual's behavioral preferences are also addressed in this framework to provide more robust decision support.

Suggested Citation

  • Gupta, Aparna & Li, Lepeng, 2007. "Integrating long-term care insurance purchase decisions with saving and investment for retirement," Insurance: Mathematics and Economics, Elsevier, vol. 41(3), pages 362-381, November.
  • Handle: RePEc:eee:insuma:v:41:y:2007:i:3:p:362-381
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    Cited by:

    1. Montserrat Guillén & Jean Pinquet, 2008. "Long-Term Care: Risk Description of a Spanish Portfolio and Economic Analysis of the Timing of Insurance Purchase," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 33(4), pages 659-672, October.
    2. V'ictor Blanco & Jos'e M. P'erez-S'anchez, 2015. "On the aggregation of experts' information in Bonus-Malus systems," Papers 1511.03876, arXiv.org, revised Nov 2016.
    3. Jost, Peter-J., 2016. "Competitive insurance pricing with complete information, loss-averse utility and finitely many policies," Insurance: Mathematics and Economics, Elsevier, vol. 66(C), pages 11-21.

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