The Long-Term-Care Insurance Puzzle: Modeling and Measurement

Abstract

Individuals face significant late-in-life risks, including needing long-term care (LTC). Yet, they hold little long-term care insurance (LTCI). Using both "strategic survey questions," which identify preferences, and stated demand questions, this paper investigates the degree to which a fundamental lack of interest and poor product features determine low LTCI holdings. It estimates a rich set of individual-level preferences and uses a life-cycle model to predict insurance demand, finding that better insurance would be far more widely held than are products in the market. Comparing stated and model-predicted demand shows that flaws in existing products provide a significant, but partial, explanation for this under-insurance puzzle.

Old, Frail, and Uninsured: Accounting for Features of the U.S. Long‐Term Care Insurance Market

“…In our baseline economy, individuals in wealth quintiles 4–5 have LTCI takeup rates of 14% and 21%, respectively. Thus, we find that the LTCI puzzle that Ameriks et al () documented for wealthy individuals can be attributed to supply‐side distortions induced by private information and administrative costs.…”

“…For the latter group, the chance of receiving Medicaid NH benefits is particularly low and full coverage is attractive to them. This final property of the model is related to the work of Ameriks et al (). They found that 59% of individuals in a sample of affluent individuals with median wealth of $546,935 have demand for an ideal state‐contingent LTCI product that is priced in an actuarially‐fair manner.…”

“…The loads for bad risks are only 0.167 and their contracts cover 82.5% of NH expenses on average. Brown and Finkelstein (2008) and Ameriks et al (2018) used a different strategy to assess the roles of high loads, incomplete coverage, and Medicaid in accounting for low LTCI takeup rates. Both of these papers specify contracts exogenously and consider counterfactuals in which individuals are offered full insurance against NH risk at an actuariallyfair price.…”

Measuring and Modeling Intergenerational Links in Relation to Long‐term Care

“…Additional text is placed in the survey to clarify the questions, and subjects take a comprehension test before completing the responses. They generally exhibit high comprehension (see Ameriks et al ).…”

“…In particular, data enrichments are being developed to more accurately quantify the impact of different savings motives related to LTC and the family. Specifically, improved separation of precautionary savings and bequest motives involves appending survey‐based data on beliefs and on preferences to classical choice data, as in Ameriks et al (, , ) and Brown, Goda, and McGarry (). Even with this, there is very little evidence on the patterns of inter vivos transfers and bequests, let alone the underlying motivations and comparative statics…”