Estate recovery and long‐term care insurance

Abstract

Estate recovery is a policy under which the State recovers part of LTC subsidies from the estates of deceased beneficiaries. This paper studies the effect of estate recovery on long-term care (LTC) insurance demand. This effect strongly relies on the bequest motive since the main purpose behind purchasing LTC insurance is to protect bequests from the financial costs of LTC. We find that the impact of estate recovery on LTC insurance depends on the level of parental bequests and on whether and how the parent anticipates the child's preferences with respect to informal care. More specifically, we show that estate recovery encourages the parent to purchase LTC insurance when his child is considered selfish or to like providing care. However, this policy could provide disincentives to LTC insurance purchase by the parent if his child is considered to dislike providing informal care. Our results also show that estate recovery reduces and may even eliminate public support crowding out of private LTC insurance demand. Finally, we characterise the welfare implications of financing LTC public support by estate recovery.

Asymmetric information, strategic transfers, and the design of long-term care policies

“…This corresponds to the share of formal home-care reported by Barczyk and Kredler (2018). 15 For a family providing the average level of informal care (a = 395), this implies that γ = 3, 975.…”

“…Formal care is chosen once β is known while a uniform g is, by definition, the same in all states of nature. Consequently, 15 Again, we focus on home care and we exclude individuals receiving nursing home care.…”

“…where SOC g denotes the second derivative of the government's problem with respect to g. The expression above is always negative under DARA, since A.5 Derivation of Equation (15) The Hamiltonian corresponding to Problem ( 14) is…”