Housing, Health, and Annuities

TitleHousing, Health, and Annuities
Publication TypeJournal Article
Year of Publication2009
AuthorsDavidoff, T
JournalJournal of Risk and Insurance
KeywordsConsumption and Savings, Demographics, Healthcare, Net Worth and Assets, Other

Abstract Annuities, long-term care insurance (LTCI), and reverse mortgages appear to offer important consumption smoothing benefits to the elderly, yet private markets for these products are small. A prominent idea is to combine LTCI and annuities to alleviate both supply (selection) and demand (liquidity) problems in these markets. This article shows that if consumers typically liquidate home equity only in the event of illness or very old age, then LTCI and annuities become less attractive and may become substitutes rather than complements. The reason is that the marginal utility of wealth drops when an otherwise illiquid home is sold, an event correlated with the payouts of both annuities and LTCI. Simulations confirm that demand for LTCI and annuities is highly sensitive to the liquidity and magnitude of home equity.

Endnote Keywords

long Term Care/Annuities/Financial planning/Personal finance/Older people/Home equity loans/Reverse mortgages/Leasebacks

Endnote ID


Citation Key7418