Long-Term Care Financing using Home Equity Release

Abstract: 
Long-term care costs are increasing globally, but especially in China where economic development and family planning policies have resulted in rapid population aging. In 2015, one in five older persons aged 65+ globally lived in China, while in 2050 one in four elderly–over 370 million people–will be Chinese. China’s old age dependency ratio was 13% in 2015, but will be close to 50% by mid-century (United Nations, 2015). The need for long-term care services in China is already large and will continue growing rapidly in the future.  The current means of financing long-term services are very limited in China. Social security programs for older people do not cover the full cost of institutionalized care and are not accredited to fund in-home care. The private market for long-term care insurance is underdeveloped. As a result, households face high out-of-pocket costs for long-term care and finance these mostly from savings and private transfers. It has been argued that uninsurable long-term care risks are a main factor explaining the very high saving rate of Chinese households(İmrohoroğlu and Zhao, 2016). At the same time, housing wealth accounts for 70-80% of retired households’ assets and there are no commercially successful equity release products to provide liquidity without the need to sell housing assets. 
Motivated by the foreseeable unmet demand for long-term care in China and the large share of home equity in household wealth, this project investigates the role of home equity release as a new funding mechanism for long-term care costs. A new financial product is analyzed, called Long-Term Care Home Equity Release (LTC Home Equity Release), that allows individuals to receive care in their own home and use their housing wealth to fund the associated costs. The project will study the following research questions:
  • How do middle-aged and older Chinese plan to receive long-term care and how do they plan to finance their long-term care needs? 
  • What is the level of demand for a new financial product that allows individuals to receive care in their own home and use their housing wealth to fund the associated costs?
Funded By: 
Boettner
Award Dates: 
July 1, 2017 - March 30, 2018