Working Papers

Kyu Park and Michael Sherris

Abstract: Private long-term care insurance (LTCI) is not available in many countries, including Australia, with individuals relying on government aged care and their own retirement savings to meet aged care needs. We consider the design of private LTCI products to cover individual out-of-pocket aged care costs, assess their pricing using a recently published model of chronic illness and disability in Australia, evaluate the capital costs for insurers and their implications for pricing, and analyse the demand for the products through utility analysis. We consider individuals in good health as well as those who are disabled or with chronic illness and incorporate estimated trends in mortality and disability. Although we focus on Australia, the results have important implications and insights for other developed countries. We consider several LTCI products, encompassing stand-alone LTCI and a life care annuity (LCA). We incorporate public aged care co-payments, a comfortable consumption level and the aged pension for Australian retirees, as well as solvency capital requirement (SCR) based on the Solvency II into our analysis. We also include a systematic literature review of LTCI pricing approaches that informs our analysis. We show how the SCR is significant for the stand-alone LTCI premiums and reduced for the LCA premiums. Our demand analysis illustrates how LTCI products increase individual utility and welfare in most cases and quantifies how this is impacted by product expense loading, risk aversion, wealth levels, and bequest motives.

Katja Hanewald and Hazel Bateman

Introduction: In Australia, as in many countries, housing wealth is a key component of retiree household savings. This was underscored by the 2020 Retirement Income Review (Australian Treasury, 2020), which reported that for most households aged 65 and over, the family home is their largest asset. The review found that using superannuation assets more efficiently and accessing equity in the home can significantly boost retirement incomes without the need for additional superannuation contributions. Based on modelling and projections, the review concluded that using relatively small portions of home equity can substantially improve retirement incomes and that releasing home equity can boost retirement incomes with a modest impact on debt.

Australian retirees have several equity release options to access the wealth tied up in their homes without having to sell the property. The government’s Home Equity Access Scheme (formerly Pension Loans Scheme) allows older Australians to supplement retirement income by accessing home equity, with repayment deferred until the home is sold. Similarly, reverse mortgages offered by different providers allow homeowners to borrow against their home equity, with the loan repaid upon selling the property, relocating, or at the borrower’s death. Other options include home reversion schemes, where a portion of the home’s equity is sold for either a lump sum or regular payments, and shared appreciation agreements, which provide payments in exchange for a share in the property’s future sale value. While these options are increasingly recognised for their potential to improve financial flexibility in retirement, their overall uptake remains modest, suggesting a need for greater public awareness and understanding.

This paper aims to provide background information, summarise recent research in this area and identify policy suggestions.