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Lapses in long‐term care insurance

Author

Listed:
  • Leora Friedberg
  • Wenliang Hou
  • Wei Sun
  • Anthony Webb

Abstract

About a quarter of long‐term care insurance (LTCI) policy holders aged 65 let their policies lapse before death, forfeiting all benefits. We find that lapse rates are substantially higher among the cognitively impaired in the Health and Retirement Study. This generates a pernicious form of dynamic advantageous selection, as the cognitively impaired are more likely to use care. Simulations show that an inappropriately optimistic asset drawdown path further increases the individual welfare cost of unanticipated lapses. Meanwhile, we find evidence of a significant but very small role for either strategic or financial motives for lapsing.

Suggested Citation

  • Leora Friedberg & Wenliang Hou & Wei Sun & Anthony Webb, 2023. "Lapses in long‐term care insurance," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 90(3), pages 569-595, September.
    • Handle: RePEc:bla:jrinsu:v:90:y:2023:i:3:p:569-595
    DOI: 10.1111/jori.12425
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    References listed on IDEAS

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    1. Brown, Jeffrey R. & Finkelstein, Amy, 2007. "Why is the market for long-term care insurance so small?," Journal of Public Economics, Elsevier, vol. 91(10), pages 1967-1991, November.
    2. Yong Li & Gail A. Jensen, 2012. "Why Do People Let Their Long-term Care Insurance Lapse? Evidence from the Health and Retirement Study," Applied Economic Perspectives and Policy, Agricultural and Applied Economics Association, vol. 34(2), pages 220-237.
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    Cited by:

    1. Lambregts, Timo R. & Schut, Frederik T., 2020. "Displaced, disliked and misunderstood: A systematic review of the reasons for low uptake of long-term care insurance and life annuities," The Journal of the Economics of Ageing, Elsevier, vol. 17(C).
    2. Daniel Gottlieb & Kent Smetters, 2021. "Lapse-Based Insurance," American Economic Review, American Economic Association, vol. 111(8), pages 2377-2416, August.
    3. Martin Eling & Omid Ghavibazoo, 2019. "Research on long-term care insurance: status quo and directions for future research," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 44(2), pages 303-356, April.

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    More about this item

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance

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