June 15, 2016 @ 2:30 pm – 3:30 pm
Auditorio Paraninfo. Claustro San Agustín. Universidad de Cartagena.

To Borrow or Insure? Long Term Care Costs and the Impact of Housing.
Michael Sherris. (CEPAR, UNSW Business School)

Long term care costs are significant to individuals who survive to older ages. Many individuals own a house that not only provides consumption benefits but also can be used to offset long term care costs. Housing equity may also be a major component of any bequest wealth on death. Given an individual who owns a house and has to fund long term care costs at older ages, a natural question that arises is whether he/she should borrow with a reverse mortgage or purchase long term care insurance. We consider an individual’s optimal choice at retirement for consumption, reverse mortgage loans, and private long term care insurance in a discrete time life-cycle model that takes into account mortality risk, health shocks and house price risk. We quantify the extent to which the demand for private long term care insurance is reduced by high levels of home equity and the impact that the availability of a reverse mortgage has on the long term care insurance decision. We show that the welfare gain from long-term care insurance alone is marginal while that from a reverse mortgage is significant. The welfare gain is substantially increased when an individual is able to both borrow and purchase long term care insurance. We assess the sensitivity to these results and show that they are robust based on the life cycle model used.

Keywords: Long term care expenses; longevity risk; reverse mortgage; home equity; life-cycle model.

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