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Creating More Choices for Older Adults: Financing LTC Through an Integrated Income and Disability Annuity

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Abstract:

Based on the work of multiple researchers and an empirical survey, the authors of this policy brief lay out the public policy implications of a combined annuity for both income and disability payments. This approach promotes providing a steady income throughout retirement and an increase in income at the onset of disability to cover the costs of long-term care. The theory behind this proposal is that by pooling disability and mortality risks into one annuity risk grouping, the opposing risks of each are balanced. The survey under discussion—the National Mortality Followback Survey—compared the combined annuity with separate purchase of income annuity and long-term care insurance.



Key Findings:



* Study simulations showed that the combined annuity increased eligibility using minimal underwriting requirements and also decreased the total premium for income and disability insurance.
* Possible limitations of the combined annuity approach are the risk of moral hazard (i.e., incentive to claim cash benefits before meeting the disability criteria) and potential fraud and abuse that exists with a cash benefit option.



The authors conclude that a combined income and disability annuity has the potential to expand the private market for long-term care financing and to reduce the total cost of purchasing both an income annuity and disability insurance.