The Perfect Retirement Investment Nobody Wants

Two of your biggest financial risks in retirement involve your health, but they’re almost opposed to each other. One is that you will require expensive long-term care early on. You will probably die young, but not before going broke from nursing home bills. Another is that you will stay healthy enough to live a very long life, but as a result you will run out of savings — even if you never require long-term care.

More than 20 years ago, the economist Mark Warshawsky saw a way to protect people from both risks in a single product that could be priced low and still make money for the insurer. I think his idea is ingenious, but it has never caught on, for reasons I’ll explain.

Warshawsky was the director of research at TIAA-CREF Institute in New York in 2001 when an article titled “In Sickness and in Health: An Annuity Approach to Financing Long-Term Care and Retirement Income” appeared in The Journal of Risk and Insurance. He wrote it with Christopher Murtaugh, the associate director at the Center for Home Care Policy and Research of the Visiting Nurse Service of New York, and Brenda C. Spillman, at the time a senior research associate at the Urban Institute in Washington.

Warshawsky, now a senior fellow at the American Enterprise Institute, was a bit surprised when I called him after being referred to him by others in the field. “No one ever has taken me up on it, so for the last 10 years I have not pursued the idea,” he said.

What Warshawsky, Murtaugh and Spillman proposed was a hybrid product combining long-term care insurance with an annuity — that is, a steady stream of payments that lasts as long as the customer lives, like Social Security. Insurers could charge less for such a hybrid product than they would have to charge if they sold each product separately because the risks would partly cancel out. If the customers needed lots of long-term care early on in the policy, they probably wouldn’t live long enough to get a lot of annuity payments. If they lived long enough to suck up lots of annuity payments, it’s probably because they hadn’t needed much long-term care early in retirement. True, some customers might become disabled at age 65 and live past 100, thus drawing on both sides of the hybrid policy, but such cases would be rare.

Insurers understandably worry about adverse selection, which is the risk that they’ll get precisely the customers they don’t want and none of the ones they do. People with health problems will apply for long-term care insurance without disclosing them, driving up premiums and scaring away healthier people from applying. To minimize that risk, insurers conduct extensive medical exams and gather applicants’ and their families’ medical histories. But that’s costly, off-putting to applicants and not foolproof. On annuities, the risk is the opposite: that only people who have good reason to believe they will live long lives will sign up, which forces the insurer to charge a higher premium for the annuity, driving off other applicants, and so on.

Warshawsky’s hybrid product would drastically reduce adverse selection because people wouldn’t apply for the double-sided protection unless they perceived the two risks for themselves as roughly balanced. In fact, Warshawsky and his co-authors calculated that insurers could pretty much dispense with medical exams and the gathering of medical histories because 98 percent of 65-year-olds would be good bets for the product. Only people who were already in such bad shape that they already qualified for long-term care would need to be turned down for coverage, they calculated. What’s more, the premiums could be 3 percent to 5 percent lower than if the two products were sold separately, they calculated.

Warshawsky said he couldn’t get even TIAA itself interested. (The institute that he worked for is a research arm of TIAA, the big financial services company.) Other companies also passed. “You can never understand fully why companies don’t do something,” he said. “There’s a zillion reasons.”

Actually, I’m pretty sure I know one of those zillion reasons: A lot of people don’t like either product separately, despite what many financial advisers tell them, so a hybrid of the two is always going to be a tough sell. Moshe Milevsky, a finance professor at the Schulich School of Business of York University in Canada, wrote to me in an email that while he admires the Warshawsky-Murtaugh-Spillman concept and thinks people should have both long-term care insurance and annuities, combining them is unlikely to “change the ingrained bias against long-term rational risk management.”

Annuities got a somewhat deserved reputation for being overly complicated and expensive, but there are new products that are standardized and cheaper. Still, there’s a lingering problem of “not wanting to commit and mistrusting the insurance companies,” Robert Shiller, a Yale University economist, wrote to me by email.

For a practitioner’s perspective I interviewed Ryan Pinney, the president of Pinney Insurance Center in Roseville, Calif., which is a broker to insurance agents. (Pinney also has a company, WholesaleInsurance.net, that sells direct to consumers.) He said there are relatively few people who are willing to give away a big chunk of their savings all at once, even if it’s for a rational reason, namely to buy an annuity that will pay them monthly checks for the rest of their lives. Warshawsky’s product would require them to do that.

Pinney referred me to OneAmerica Financial Partners, an insurance company in Indianapolis that sells a product combining an annuity with long-term care insurance. But Dennis Martin, OneAmerica’s president of individual life and financial services, told me that his company’s product isn’t quite what Warshawsky had in mind. One difference is that people aren’t required to turn the pool of money in their accounts into an immediate annuity; they can choose whether to use the money to pay for long-term care, but any unused funds are paid out at death. So the natural hedge that Warshawsky’s concept depends on doesn’t exist.

“Mark has done really good work on this, and I think his combination concept is promising,” Mark Iwry, a nonresident senior fellow at the Brookings Institution and former senior adviser to the Treasury secretary, told me. But, he said, “It’s been a multidecade challenge to get people to buy, and industry to offer, consumer-protective, transparent and competitively priced annuities.” And, he said, the long-term care insurance market “has not worked well for many years.” If you don’t like broccoli and you don’t like brussels sprouts, you probably aren’t going to like a broccoli and brussels sprouts salad. Then again, hope springs eternal.

The Readers Write

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Ian A. Crossley
Brixham, England

The Maritime Administration’s recent decision to deny ports the ability to procure cargo-handling equipment from overseas with grant funds will almost certainly limit the effectiveness of the Bipartisan Infrastructure Law’s historic funding.
Chris Connor
Washington, D.C.
The writer is the president of the American Association of Port Authorities.

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Michael McCarthy
Huntington Beach, Calif.

Quote of the Day

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— Eleanor Roosevelt, “My Day” column, Nov. 5, 1958