By Anthony Webb

Literature review Overview

This paper critically appraises the literature on the impact of the risk of incurring out-of-pocket health-care costs, primarily long-term care costs, on the value of annuitization and the optimal annuity share of financial wealth. A limitation of the literature is its focus on unmarried individuals. Care costs affect the finances of the surviving spouse and likely substantially increase the optimal annuity share for married couples because Medicaid spousal protection rules favor annuitized over unannuitized wealth. Models excluding housing wealth also understate the optimal annuitized share because housing wealth can be liquidated to pay for care costs, which reduces the need to retain liquid financial assets. Annuities providing enhanced benefits when in long-term care will likely appeal only to the upper-middle class; for lower-wealth households, much of the benefit of long-term care insurance accrues not to the policyholder but to the government in the form of lower Medicaid outlays.