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Explaining lapse in long-term care insurance markets
1Department of Health Studies, University of Chicago, Chicago, IL 60637, USA. konetzka@uchicago.edu
Health Economics
|October 1, 2010
Summary
Lapse of private long-term care insurance (LTCI) is driven by financial factors, not health improvements. Higher lapse rates among less healthy individuals necessitate policy considerations for market expansion.
Area of Science:
- Health Economics
- Insurance Studies
- Gerontology
Background:
- Private long-term care insurance (LTCI) is proposed to finance care for the elderly.
- Policy lapse is a significant, understudied issue in LTCI.
- Lapse results in financial loss and renewed LTC expenditure risk for individuals.
Purpose of the Study:
- To understand the motivations behind LTCI policy lapse.
- To identify predictors of policy lapse.
- To examine adverse selection related to LTCI lapse.
Main Methods:
- Analysis of Health and Retirement Study data (1996-2006).
- Inclusion of 3974 respondents with private LTCI.
- Estimation of baseline and dynamic lapse predictors.
Main Results:
- Lapse is associated with lower socioeconomic status, poorer health, and minority status.
- Health status changes have a minor impact on lapse decisions.
- Little evidence of ex post adverse selection was found.
Conclusions:
- LTCI lapse is primarily driven by financial concerns and available alternatives, not health reassessment.
- Higher lapse rates among less healthy individuals require explicit consideration in LTCI market expansion strategies.
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