The demand for long-term care and longevity insurance

This thesis studies the demand for long-term care (LTC) and longevity insurance from both theoretical and empirical perspectives. The results provide insights into the design of new retirement products and policy settings, which attempt to address the current weak markets for both products.The thesis first develops a life-cycle model of annuitization, consumption, and investment decisions for a single retiree facing stochastic capital market returns, uncertain health status, mortality risk, and uncertain out-of-pocket healthcare expenditure. Simulation results from the calibrated model show that a life care annuity product, from bundling LTC and longevity insurance, significantly increases the optimal annuitization level. This product substantially improves individual welfare by allowing for a higher level of consumption and investing a higher proportion of liquid wealth in the risky asset. The thesis then conducts and analyzes a large experimental survey where participants make hypothetical allocations of retirement savings to three products: a LTC income product, a life annuity and a liquid investment account. The LTC income product offers income in LTC states whether paid services are used or not. Results show that this product complements, rather than substitutes, high-level informal care. Having access to the product materially affects the annuitization choices for around half of participants, allowing most individuals in this group to release precautionary savings and purchase additional longevity insurance. While no evidence is found against a risk pooling equilibrium in the purchase decision of life care annuities, there is evidence against the equilibrium due to adverse selection in the preferred product features among female purchasers.The thesis finally calibrates individual utility parameters in a life-cycle model of the retirement phase, using the stated preferences for LTC insurance. Results show that the calibrated model can explain the stated demand for the LTC income product for 80\% of survey participants, accounting for around two thirds of the variation. The preferences of individuals who plan to rely on family members for low-level care but would pay for professional high-level care are better explained. The model predictability is also positively correlated with individuals' financial literacy, product knowledge, and education