The Immediate Needs Annuity and Long-Term Care Insurance

• In Event: Income Sources in Retirement

Abstract

The market for traditional long-term care insurance is quite small in high-income countries, even in those that lack universal insurance. The market for traditional income annuities is also small, and in the United States, annuities aren’t medically underwritten. That means that there is essentially no market for individuals seeking to insure consumption or bequests very late in life. In the United Kingdom, an immediate needs annuity (INA) has emerged. Individuals purchase an INA when the need for care arises. INAs are medically underwritten, like long-term care insurance, but annuity payments aren’t dependent on care usage. Compared to purchasers of income annuities, the expected remaining lifespan of an INA purchaser is diminished, yet the variance—relative to expected longevity—might be considerably increased.
In this paper, we describe the functioning of INAs in the U.K. market and evaluate the potential demand for them in a theoretical model, with implications for U.S. demand and government care costs. We find that purchasing an INA upon first needing care makes individuals better off if they have moderate to high wealth levels. INA purchasers are able to sustain higher levels of consumption in their remaining lifetimes; and while their assets initially drop at purchase, asset levels (and hence potential bequests) decline more slowly afterwards than they would otherwise. We also find that for individuals at the lower end of the wealth levels at which an INA purchase is optimal, the likelihood of using government-financed care drops by a moderate amount.

Authors

• Leora Friedberg, lf6s@virginia.edu

• anthony webb