Financial protection for the elderly - contracts based on equity release and critical health insurance

Abstract

Purpose: The purpose of the article is to present a new marriage contract combining the advantages of the reverse annuity contract and the critical health insurance contract. The content of the article focuses on the method of determining premiums and benefits related to this contract. Design/Methodology/Approach: The multistate model is used to describe the survival time of the spouses. The elements of transition probabilities matrix were estimated assuming that the stochastic process describing further life expectancy has Markov property. Empirical examples are presented on the basis of data concerning lung cancer taking into account the incidence, mortality and fatality rates from this disease. Findings: The obtained results indicate that older people can obtain additional financial resources which can improve the quality of life and raise its standard significantly. Moreover, additional financial protection can be ensured in case of a critical illness. Practical implications: The described contract can be used in practice as a form of providing additional financial resources supplementing the home budget of pensioners, especially in the event of a serious illness. The contract can also be used with the option of long-term care insurance. Despite the guaranteed free health care, such contracts can significantly increase the quality of life of patients during a chronic severe illness. Originality/Value: The model presented in the paper is original. It allows flexible modelling of cash flows to provide financial protection in case of low income during retirement and health deterioration of the elderly.