Supply or Demand: Why is the Market for Long-Term Care Insurance so Small?

40 Pages Posted: 20 Sep 2004 Last revised: 24 Aug 2009

See all articles by Jeffrey R. Brown

Jeffrey R. Brown

University of Illinois at Urbana-Champaign - Department of Finance; National Bureau of Economic Research (NBER); University of Illinois College of Law; University of Illinois at Urbana-Champaign - Institute of Government and Public Affairs (IGPA); University of Illinois at Urbana-Champaign - Department of Economics

Amy Finkelstein

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: September 2004

Abstract

Long-term care represents one of the largest uninsured financial risks facing the elderly in the United States. Whether the small size of this market is driven primarily by supply side market imperfections or by limitations to demand, however, is unresolved, largely due to the paucity of data about the structure of the private market. We provide what is to our knowledge the first empirical evidence on the pricing and benefit structure of long-term care insurance policies. We estimate that the typical policy purchased by a 65-year old has an average pricing load of about 18 percent and has a very limited benefit structure, covering only one-third of the expected present discounted value of long-term care expenditures. These findings are consistent with the presence of supply side market imperfections. However, we also find enormous gender differences in pricing -- typical loads are 44 cents on the dollar for men but better than actuarially fair for women -- that do not translate into differences in coverage. And, although purchased policies provide limited benefits, we demonstrate that more comprehensive policies are widely-available at similar loads, but are rarely purchased. These findings suggest that while supply-side market imperfections exist, they are not the primary cause of the small size of the private long-term care insurance market.

Suggested Citation

Brown, Jeffrey R. and Finkelstein, Amy, Supply or Demand: Why is the Market for Long-Term Care Insurance so Small? (September 2004). NBER Working Paper No. w10782. Available at SSRN: https://ssrn.com/abstract=593466

Jeffrey R. Brown (Contact Author)

University of Illinois at Urbana-Champaign - Department of Finance ( email )

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Amy Finkelstein

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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