Why Do People Lapse Their Long-Term Care Insurance?

Long-term care, including both nursing home and home health care, is a substantial financial risk for most retired households. Yet few buy long-term care insurance, and many who do let the policies lapse even after holding them for years. This brief summarizes a new study that shows more than one third of individuals with long-term care insurance at age 65 will lapse their policies before death, forfeiting all benefits. Economic theory predicts that individuals at high risk of needing care should retain coverage while those at low risk should lapse, but the data show the opposite pattern: people who subsequently use care are more likely to lapse, even though many have a good understanding of their relative risk of going into care. This brief seeks to explain why individuals lapse – specifically whether the decision reflects the financial burden of insurance premiums, a strategic calculation, or a deterioration in cognitive ability. The brief proceeds as follows. The first section presents data on lapse rates. The second section lays out alternative explanations for lapse rates. The third section tests these explanations by examining who lapses and then assesses the consequences of lapsing by exploring who uses long-term care. The final sec­tion concludes that two types of individuals are more likely to lapse: 1) those with low cognitive ability, who may lose the capacity to manage their finances; and 2) those with lower incomes and less wealth, who may find that their policy has become unaffordable.