Lingfeng Lyu, Michael Sherris

Population ageing is driving up long-term care (LTC) costs and straining public budgets. Yet private LTC insurance (LTCI) markets remain small, and retirees’ substantial home equity is largely untapped as a financing source. We develop a continuous-time life-cycle framework that writes the cross-dependencies among nested means-tested programmes (age pension, home care, and home equity release) directly into the household optimisation, with health states aligned ex ante to eligibility thresholds via a proportional-odds model. By generating both household decisions and government fiscal exposure as endogenous outputs, our framework allows us to jointly evaluate private LTCI and public support across the wealth distribution. Three findings emerge. First, the means-tested Home Equity Access Scheme (HEAS) functions as a liquidity-bridging channel for the LTCI premium; however, this chan-nel narrows along the wealth distribution due to HEAS’s compounding borrowing rate, with bequest motives reinforcing the closure at the top. Second, private LTCI exhibits a fiscal divide: it generates net public savings for lower-wealth households (1.7%–2.7%), yet results in no discernible change to government expenditure for wealthier cohorts. Third, nested means tests impose a hump-shaped clawback on private LTCI indemnities that peaks at the income-to-asset test transition and scales with health severity, hollowing out the middle of the wealth distribution. These findings imply that expanding private LTCI is fiscally sustainable, but requires coordinated reform of the means-testing architecture: flattening the clawback peak and differentially recalibrating HEAS access across the wealth distribution.