In Sickness and in Health: An Annuity Approach to Financing Long-Term Care and Retirement Income

Abstract

We examine the implications of the positive correlation of mortality and disability for the benefits of combining an immediate income annuity with long-term care disability coverage at retirement ages. Specifically, we show that combining the two products could reduce the cost of both coverages and make them available to more persons by reducing adverse selection in the income annuity and minimizing the need for medical underwriting for disability coverage. We find that minimal underwriting, excluding only those who would be eligible for disability benefits at purchase, would increase the potential market to 98 percent of 65-year-olds, compared with only 77 percent under current long-term care insurance underwriting practice. After the 2 percent representing the worst risks for high disability payments is excluded, simulated premiums for the combined product are lower by 3 to 5 percent than total simulated premiums for stand-alone income annuities and underwritten long-term care disability insurance purchased separately. We estimate premiums for all persons at age 65 and age 75 and premiums by gender at age 65. We also investigate the value of such a combined benefit to various subgroups of prospective purchasers and the implications of possible errors and moral hazard in the reporting of disability status and making claims