Lingfeng Lyu, Michael Sherris

Australia has no private long-term care insurance (LTCI) market. The recent aged care reforms, which shift more of the cost of home care onto households, raise the question whether LTCI could complement public support. We develop a continuous-time lifecycle model of retired homeowners under a means-tested age pension, a means-tested home care subsidy with a lifetime cap on fees, and the government reverse mortgage scheme. These homeowners choose consumption and portfolio allocation continuously, and at retirement fix their LTCI coverage and the fraction of the permitted home equity release that they draw. The means tests that set the pension and the home care fee would count the LTCI contract and its indemnity. The model is solved by policy iteration and calibrated to Australian panel data. At an actuarially fair premium, almost no household buys LTCI when home equity release is also offered, and fewer than one in five buys it when release is not offered. Exempting the LTCI contract from the means tests raises the insured share of households to nearly half, with or without release. With the contract assessed and a bequest motive, release lowers LTCI demand, because the home is kept during home care and drawing can then provide money when LTCI pays. For the government, a premium rebate for LTCI raises the insured share of households. The government could recover the rebate through the means tests, but at a rebate of 30 per cent of the loaded price, the tests on average give insured households more than they take back.