Life care annuities to help couples cope with the cost of long-term care

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Facultad de Ciencias Económicas y Empresariales. Instituto Complutense de Análisis Económico (ICAE)
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This paper examines the possibility of including cash-for-care benefits in life care annuities (LCAs) to help retired couples cope with the cost of long-term care (LTC). It aims 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 present an actuarial method based on array calculus to value this type of LCA. The impact of introducing the LTC contingency on the annuity is assessed by comparing the initial benefits in both cases. The difference in the initial benefit arises due to the annuity factors used to compute the benefits. 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 expected years both spouses will be alive (joint life expectancy) and the expected years the surviving spouse will be a widow(er) (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.
Funding: the authors are grateful for the financial assistance received. This work was supported by the Basque Government (Project IT1336-19): Carlos Vidal-Meliá and Juan Manuel Pérez-Salamero González; and by the Spanish Ministry of Science, Innovation and Universities MCIN/AEI/10.13039/501100011033, I+D+i PID2020-114563GB-I00: Carlos Vidal-Meliá, Juan Manuel Pérez-Salamero González and Manuel Ventura-Marco. Acknowledgements: the authors are especially grateful to Peter Hall for his help with the English text. Department of Financial Economics and Actuarial Science, University of Valencia, Valencia. (Spain); ORCID Author ID: 0000-0002-4510-7499, Corresponding author. Department of Financial Economics and Actuarial Science, University of Valencia (Spain) and research affiliate with the Instituto Complutense de Análisis Económico (ICAE), Complutense University of Madrid (Spain), ORCID Author ID: 0000-0002-7227-5076, Department of Financial Economics and Actuarial Science, University of Valencia, Valencia. (Spain); ORCID Author ID: 0000-0001-7710-4869,
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