A modeling framework for optimal long-term care insurance purchase decisions in retirement planning.
The level of need and costs of obtaining long-term care (LTC) during retired life require that planning for it is an integral part of retirement planning. In this paper, we divide retirement planning into two phases, pre-retirement and post-retirement. On the basis of four interrelated models for health evolution, wealth evolution, LTC insurance premium and coverage, and LTC cost structure, a framework for optimal LTC insurance purchase decisions in the pre-retirement phase is developed. Optimal decisions are obtained by developing a trade-off between post-retirement LTC costs and LTC insurance premiums and coverage. Two-way branching models are used to model stochastic health events and asset returns. The resulting optimization problem is formulated as a dynamic programming problem. We compare the optimal decision under two insurance purchase scenarios: one assumes that insurance is purchased for good and other assumes it may be purchased, relinquished and re-purchased. Sensitivity analysis is performed for the retirement age.
Gupta
Aparna
A
Decision Sciences and Engineering Systems, Rensselaer Polytechnic Institute, 110 Eighth Street, Troy, NY 12180, USA. guptaa@rpi.edu
Li
Lepeng
L
D000368:Aged; D003661:Decision Support Techniques; D006301:Health Services Needs and Demand; D006801:Humans; D007353:Insurance, Long-Term Care; D008875:Middle Aged; D010934:Planning Techniques; D012179:Retirement