Living to 100 and beyond: Implications of longer life spans

North American Actuarial Journal, Jul 2002 by Rappaport, Anna M, Parikh, Alan

Many factors influence the availability of unpaid caregiving. The Robert Wood Johnson Foundation (1996) has suggested that the "caregiving ratio" can be a useful tool to measure the trends in the availability of unpaid caregiving. This ratio is the number of individuals in the population between the ages of 50 and 64 (that is, those who are closest to the average age of caregivers) divided by the number of individuals 85 and above. While not an ideal measure of caregiving availability, this ratio does highlight an important demographic trend. In the United States, as in most developed countries, this ratio will shrink over the coming decades, from 9.6 in the year 2000 to 4.3 in the year 2040. This trend, the result of smaller families and increasing life spans, will result in fewer unpaid caregivers, greater burdens on those who provide this care, and increasing reliance by the disabled elderly on paid caregiving.

IV. IMPACT ON BUSINESS: OPPORTUNITIES

Businesses in the United States that target the elderly have already experienced substantial growth in the size of the markets that they serve, triggered by the growth in numbers of the elderly, the lengthening of their life spans, and the increasing wealth of the nation as a whole over the last century. In many ways, continued reductions in mortality rates will merely add momentum to this already powerful trend. In other ways, the very nature of the emerging business opportunities will likely change as the age profile of the elderly shifts upward.

Annuity Insurance

Insurance companies may play a key role in helping the elderly manage the risks associated with old age, risks which longer life spans will only magnify. The most direct way of managing the financial risks associated with longevity is through annuitization-purchase from an insurer of a guaranteed income stream that continues as long as the beneficiary is alive. Insurers in turn need to manage their own risks in issuing these annuity policies and are therefore keenly interested in understanding the future course of longevity, as well as the potential uncertainties that they must insure themselves against through hedging, asset allocation strategies, and reinsurance. However, the future use of annuities is unclear as relatively few members of the public recognize the need to insure against living too long.

Long-Term Care Insurance

Long-term care insurance policies are gaining prominence as a retirement planning tool, especially among those who are wealthier and can afford them. Such policies typically insure the beneficiary for nursing home, home health care, adult day care, respite care, and alternative care services. The need for these services is expected to explode in the coming decades, as the population of those over 65 with activity limitations is projected to more than double by 2030 (Rice 1996). There is a great opportunity for the development and sale of insurance for financing these services, but it is not clear how much penetration this financing mechanism will have.