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Converting retirement benefit into a life care annuity with graded benefits

Author

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  • Javier Pla-Porcel
  • Manuel Ventura-Marco
  • Carlos Vidal-Meliá

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.

Suggested Citation

  • Javier Pla-Porcel & Manuel Ventura-Marco & Carlos Vidal-Meliá, 2017. "Converting retirement benefit into a life care annuity with graded benefits," Scandinavian Actuarial Journal, Taylor & Francis Journals, vol. 2017(10), pages 829-853, November.
    • Handle: RePEc:taf:sactxx:v:2017:y:2017:i:10:p:829-853
    DOI: 10.1080/03461238.2016.1258370
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    Cited by:

    1. Carlos Vidal-Meliá & Manuel Ventura-Marco & Juan Manuel Pérez-Salamero González, 2018. "Actuarial accounting for a notional defined contribution scheme combining retirement and longterm care benefits," Documentos de Trabajo del ICAE 2018-16, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.

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