Housing Equity Withdrawal in the Portfolio Choice for Financing the Long-Term Care Facilities

Across the European Union, currently, 40 million older people are dependent on the help from others (EC, 2015a). This number will rise to 55 million until 2060. More than 4 million of dependent old people live in segregated residential institutions which cannot ensure person-centered services to bring about full inclusion of seniors to the community. This number will more than double till 2060 even in the case that we shall develop more proper facilities. Human dignity and the respect for human rights guide the European Member States to implement adequate reforms of long-term care systems (LTC). Following the provisions of the UN Convention on the Rights of Persons with Disabilities and the European Convention on Human Rights (EC, 2017), we should implement measures reinforcing the transition from institutional to community-based services. The process is named Deinstitutionalisation. It requires to build new facilities for seniors and to remodel their homes adapting for the persons with declining functional capacities. We have to develop sufficient number of the following care facilities: (a) Independent Living Communities, (b) Assisted Living Facilities, (c) Residential Care Facilities, (d) Continuing Care Communities and (e) Nursing Homes, to provide required assistance and care for persons who are dependent on help of others and their functional capacities are declining. For the different level of functional capacity of seniors, different facilities are needed. We have calculated how much it will cost and what would be the possible financial sources to cover these expenses, on the basis of the National Health Institute database. In our study, we developed the model of adaptation of different facilities to the functional decline and wishes of seniors and calculated the needed monthly premiums which are payable for 40 years, from age 25 to 64 to cover expenditures for the long-term social care in a properly built environment. We have combined these financial sources with potential Housing Equity Withdrawal (HEW) from homes of seniors who are owners of their home. Therefore, in this article Equity Release Schemes have been studied in the context of the Long-term Care Insurance and behaviour of the urban land rent. We have compared the insurance schemes based on HEW and insurance schemes with monthly premiums from their gross salary. ERS could transform fixed assets in owner’s occupied dwellings into liquid assets for LTC including proper facilities. We have shown how the interest rate variation, which can reduce the income of older persons even below the targeted quality of LTC, has a significantly smaller impact on welfare of the elderly if these sources, which depend on a volatile interest rate and which have a positive covariance with the interest rate, are combined with the ERS loan model based on the old persons previous housing or home in the community villages, adapted for seniors, where the correlation coefficient is negative. Because of the volatility of the interest rate the proper combination of annuities paid from their gross salary and dynamics of ERS drawings from senior’s housing units has to be planned to decrease the volatility of combined cash flows deriving from both pillars. Therefore, it is wise making a trade-off between these two schemes. The calculation based on the data of average value of a home owned by seniors and the costs of LTC consisting of the average costs of care in each of four categories of LTC, where the facilities are adapting to these categories are giving the optimal portfolio for LTC in proper built environment in Slovenia. The numerical example is based on the German Mortality Tables DAV1994R, as required by Slovenian Agency for Insurance Supervision.