Cheng Wan, Hazel Bateman and Katja Hanewald
Abstract: We develop a rich life-cycle model to assess the demand for life annuities, critical illness insurance, and long-term care insurance by retirees in a portfolio-allocation setting. We calibrate our model to urban China, where retirees face limited public insurance and undeveloped private markets. We show that retirees with a low pension should allocate at least 30% of their financial wealth at retirement to a life annuity. Those with an average pension should allocate at least 30% to critical illness insurance. The allocation to long-term care insurance ranges from 5% to 33% across all economic profiles considered. Access to critical illness and long-term care insurance does not necessarily increase annuity demand. However, access to annuities decreases the demand for long- term care insurance. Our results suggest that countries with limited public insurance should first ensure the adequacy of retirement income and then focus on covering catastrophic medical expenses while providing basic long-term care services for all.
Keywords: Life-cycle saving; Annuity; Long-term care insurance; Critical illness insurance; Health insurance; Retirement; China
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