Joint life care annuities to help retired couples to finance the cost of long-term care

Abstract

This paper examines the possibility of including cash-for-care benefits in life care annuities (LCAs) to help retired couples to cope with the cost of long-term care (LTC). The paper develops an actuarial model to assess how much it would cost to add an extra stream of payments to annuities for couples should either or both require LTC. We also analyse how willing couples would be to choose this type of LCA. Using Australian LTC transition probability data for a realistic calibration and assuming independence of the risks involved, we numerically illustrate the model and the theoretical findings implied. The paper highlights the importance of reporting the joint life expectancy and the survivor life expectancy broken down by health state, given that this information makes the computation of the actuarial factors transparent and provides highly useful information to help the couple understand the need to be protected against the cost of LTC services. Our proposal could be welfare-improving, especially for “dual-earner” couples, given that under the assumption that coordinated retirement behaviour exists within the couple, the availability of LCAs for couples may complete the market over and above the use of products for individuals alone.