The Long-Term-Care Insurance Puzzle: Modeling and Measurement

61 Pages Posted: 11 Oct 2016

See all articles by John Ameriks

John Ameriks

The Vanguard Group, Inc.

Joseph Briggs

Board of Governors of the Federal Reserve System

Andrew Caplin

New York University (NYU) - Department of Economics; National Bureau of Economic Research (NBER)

Matthew D. Shapiro

University of Michigan at Ann Arbor - Department of Economics; National Bureau of Economic Research (NBER)

Christopher Tonetti

New York University (NYU)

Date Written: October 2016

Abstract

Individuals face significant late-in-life risks, prominently including the need for long-term care (LTC). Yet, they hold little long-term care insurance (LTCI). In this paper we use a structural model and a purpose-designed dataset to understand the determinants of insurance demand. We distinguish between a fundamental lack of desire to insure, crowd out from existing insurance, and unmet demand due to poor products available in the market. The model features individual-specific non-homothetic health-state-dependent preferences over normal consumption, consumption when in need of long-term care, and bequests, which are estimated using strategic survey questions. To account for differences between the modeled and measured insurance products, we study not only individuals' holdings of LTCI, but also their stated demand for an idealized product that mirrors that in the model. We find that many individuals would purchase LTCI and receive a large consumer surplus if it were a better product, while many others do not want to purchase even high-quality actuarially fair LTCI due to the values of their heterogeneous state-dependent preferences, their demographics, and their financial situation.

Suggested Citation

Ameriks, John and Briggs, Joseph and Caplin, Andrew and Shapiro, Matthew D. and Tonetti, Christopher, The Long-Term-Care Insurance Puzzle: Modeling and Measurement (October 2016). NBER Working Paper No. w22726. Available at SSRN: https://ssrn.com/abstract=2850260

John Ameriks (Contact Author)

The Vanguard Group, Inc. ( email )

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Joseph Briggs

Board of Governors of the Federal Reserve System

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Andrew Caplin

New York University (NYU) - Department of Economics ( email )

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Matthew D. Shapiro

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Christopher Tonetti

New York University (NYU) ( email )

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