Reducing the Under-Insurance Puzzle by Product Design: Experimental Evidence of Life Care Annuity Demand

Shang Wu, Hazel Bateman, Ralph Stevens and Susan Thorp

We investigate whether a life care annuity - the integration of a life annuity with long-term care insurance (LTCI) - can enhance insurance participation to mitigate the economic puzzle of under- insurance in the longevity insurance and LTCI markets. Using an online choice experiment, we elicit individuals' preferences for consumption in different health conditions and their demand for a life care annuity and its health-contingent income feature. We find that on average people prefer to spend more in good health than in bad health. However, those who are more forward looking, have certain cultural backgrounds, and have higher long-term care risk have a stronger preference for consumption in bad health. Results also show that over half of the participants prefer income-indemnity LTCI paying cash benefits than expense-reimbursement insurance. These preferences are mainly driven by the flexibility provided by income-indemnity insurance and by the needs to compensate for informal care. While we find no evidence of selection effects in the purchase decision of life care annuities, we find that individual preferences over the income features of the product could potentially lead to a separating equilibrium of various risk types. We also document other determinants of the demand for life care annuities, including availability of informal care, financial circumstances, awareness of long-term care risk, and product knowledge.