Misperception, self-reported probabilities and long-term care insurance take-up in the United States

In the United States as in other developed countries, the take-up of Long-Term Care (LTC) insurance remains very low, suggesting that many individuals underestimate their future needs for professional LTC services. This paper examines the relationship between subjective expectations and LTC insurance demand, with a particular focus on miscalibration of survival beliefs. Using 12 waves of the Health and Retirement Study (1996–2018), we estimate various random effects linear probability models of LTC insurance take-up among individuals aged 50–75 years. We rely on two self-reported expectation measures: the probability of survival and the probability of nursing home entry. We then classify individuals into three groups – consistent, positive deviation, and negative deviation – based on the difference between subjective survival beliefs and life-table benchmarks. Robustness analyses are carried using alternative miscalibration measures, age groups and control variables. Our findings reveal strong heterogeneity. Individuals whose beliefs are consistent with life-table probabilities purchase more LTC insurance when they expect to live longer, in line with higher anticipated old-age expenditures. By contrast, individuals who substantially overestimate survival ("positive deviation" group) display no systematic response to either type of expectation, which could be related to cognitive difficulties in projecting future needs. Those who underestimate survival ("negative deviation" group) are responsive to nursing home expectations but less so to survival, indicating that they may anticipate short-term care needs but not long-term expenditures. Taken together, these results suggest that miscalibration of survival beliefs is an important determinant of insurance demand. They highlight that underestimation and overestimation reflect different mechanisms – potential private health information in the former case and cognitive limitations in the latter – ultimately contributing to the persistently low take-up of LTC insurance in the U.S.