Lapses in Long-Term Care Insurance.

Area of Science:

• Gerontology
• Health Economics
• Insurance Studies

Background:

• Long-term care insurance (LTCI) is crucial for financing later-life care needs.
• A significant portion of LTCI policies lapse before policyholders utilize benefits.
• Cognitive impairment is a primary driver for long-term care utilization.

Purpose of the Study:

• To investigate the lapse behavior of LTCI policyholders, particularly focusing on the role of cognitive impairment.
• To quantify the impact of cognitive impairment on LTCI policy lapse rates.
• To analyze the economic consequences of policy lapses for individuals and the insurance market.

Main Methods:

• Analysis of lapse rates using data from the Health and Retirement Study (HRS).
• Examination of the correlation between cognitive status and LTCI policy lapse.
• Simulation modeling to assess the welfare costs associated with unanticipated policy lapses and asset drawdown strategies.

Main Results:

• Around 25% of LTCI policies lapse before death, resulting in forfeiture of benefits.
• Lapse rates are markedly higher among individuals with cognitive impairment.
• Cognitive impairment creates advantageous selection, as impaired individuals are more likely to need care but lapse policies.
• Optimistic asset drawdown projections exacerbate the financial cost of unexpected lapses.
• Strategic or financial motives play a minor role in policy lapses.

Conclusions:

• Cognitive impairment is a critical factor driving LTCI policy lapses, disproportionately affecting vulnerable populations.
• Unanticipated lapses, especially when combined with poor financial planning, impose significant individual welfare costs.
• Insurance policies and financial planning need to account for cognitive decline to mitigate adverse selection and protect policyholders.