Risk Management and Insurance

Inflation. It is not possible to insure against inflation directly, but various strategies can be used to offer a better hedge against inflation. For example, if annuities are purchased, either inflation-adjusted annuities with a fixed, built-in escalator, such as 3 percent or 5 percent can be used. An investment strategy for financial assets should take into account expectations with regard to inflation, and should also reflect the individual’s view as to the best investments considering the expected economic environment. Many people feel that investing part of their assets in common stocks is a good hedge against inflation. Whether this is sensible depends on the total portfolio, and on all sources of retirement income.

Other family changes. The death of a spouse is a very common change for elderly Americans, and the economic loss associated with the death of a spouse can be insured. Many older Americans also provide assistance to parents, children, or grandparents. This assistance can be in the form of care during frailty, it can be financial assistance, or it can be other support. In some cases, older Americans are asked to care for a parent after the spouse of that person is disabled or deceased. Generally, these are a challenge to plan for and are not insurable, but they are a reason for having more savings. Some of them can be partly insured. For example, long-term care insurance can be purchased on parents. [Life insurance can be purchased on a parent if the child expects to become responsible for the surviving parent after the death of one parent.]

Changes in functional status. Services to the frail elderly can be provided at home, in nursing homes, or in a variety of housing settings. In general, there is no insurance against moderate changes in functional status and the extra needs that result; long-term care insurance is activated upon evidence of need of assistance in several activities of daily living. An individual experiencing and needing help as functioning status declines may need to draw on savings. An individual can also plan housing that is flexible. Developments of the past several decades in public- and private-sector approaches to housing for older adults have been motivated in part by the need for housing that adjusts to these gradual, noninsurable, declines. For example, many elderly housing developments accommodate wheelchairs easily and have handrails in corridors for those with balance problems.

Another way to plan for moderate changes in functional status is to live near children or other family members who can provide some help if it is needed. Some retirement communities provide help. A continuing care retirement community (CCRC) integrates housing, medical care, assistance with daily living, and a variety of social and other activities. This type of community is of particular interest to actuaries, in that it often provides a form of medical and/or long-term care insurance. CCRCs typically require a down payment at entry and a monthly fee. They also have health requirements at entry and provide a range of services, some of which may require additional fees.

Changed housing needs. Owning a home with a good resale value offers a good chance that one will have the resources to move into different housing as needs change. The CCRC is a way of insuring that housing will be available that fits one’s needs as one becomes more frail. However, it does not guarantee that one will be near children, or fit new interests. There is no other direct financial vehicle to protect one in the event of changing housing needs.