Pensions, annuities, and long-term care insurance: On the impact of risk screening

We examine the interaction between the choice of a retirement vehicle and the purchase of long-term care insurance in a world where agents learn about their longevity and long-term care risk over time. In our setting, and absent any long-term care issues, acquiring a retirement product before learning one’s risk type would be preferred by risk averse agents. When we introduce the possibility of needing longterm care, some agents will prefer to wait until they know their health status (i.e., their risk type) before purchasing a retirement product (a situation akin to having a defined contribution pension plan), whereas others will opt to purchase their retirement product before learning their health status (a situation akin to having a defined benefit pension plan). The preference of one retirement vehicle over the other depends, inter alia, on the level of information asymmetry on the market, on an agent’s risk aversion, and on the probability of needing long-term care and its potential cost. When agents purchase their retirement vehicle after (resp. before) knowing their their health status, then agents will choose a contract that provides them with (resp. less than) full long-term care insurance coverage.