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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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    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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