Life-Care Tontines

This paper builds on the advantage of pooling mortality and morbidity risks, and their inherent natural hedge. We focus on classical mutual risk pooling schemes, i.e. tontines, and introduce a "life-care tontine", which in addition to retirement income targets the needs of long-term care coverage for an ageing population. This scheme reduces adverse selection costs and is actuarially fair at each time. Pooling heterogeneous risks (i.e. different age groups) is shown to reduce overall risk. The life-care tontine is compared to a classical life-care annuity. Technically, we rely on a backward iteration to deduce the smoothed cashows pattern and the separation of cash-ows in a fixed withdrawal and mortality and/or morbidity credits. We apply our model to real life data, illustrating the adequacy of the proposed tontine scheme.