Short Summary:

We examine the interaction between the choice of a retirement saving vehicle and the purchase of long-term care insurance in a world where agents learn over time about their long-term care (LTC) risk. Absent any LTC issues, acquiring a savings product before learning one’s health status (or risk type) would be preferred by risk averse agents. When the possibility of needing LTC is introduced, some agents will prefer to wait until they know their health status before purchasing a retirement product (a situation akin to having a defined-contribution pension plan), whereas others will opt to purchase their retirement product before learning their health status (a situation akin to having a defined-benefit pension plan). The preference for one retirement saving vehicle over the other depends on several factors. When agents purchase their retirement vehicle after (resp. before) learning their health status, then agents will choose a contract that provides (resp. less than) full LTC insurance coverage.

Publication Authors: Martin Boyer and Franca Glenzer
Number: 16-03
Year: 2016