Why Don't Retirees Insure Against Long-Term Care Expenses? Evidence from Survey Responses

Jeffrey R. Brown, Gopi Shah Goda, Kathleen McGarry

NBER Retirement Research Center Paper No. NB 11-05
Issued in September 2011

We conduct a detailed survey of those nearing and in retirement to help assess the relative support for numerous alternative hypotheses regarding the small size of the long-term care insurance market. We categorize these hypotheses into four broad categories: (i) Preferences and Beliefs, which includes factors such as time preference, risk aversion, bequests, state-dependent utility, and beliefs about the need for care, (ii) Substitutes for Insurance, such as the ability to pay for care out of wealth, home equity, or family resources, a plan to rely on Medicaid, or mistaken beliefs that such care is covered by Medicare, (iii) Substitutes for Formal Care, most notably including the ability to receive care from family members rather than relying on formal market-based care, and (iv) Features of the Private Market, including concerns about cost, affordability, counter-party risk, and distrust of insurers. We find numerous significant differences in the likelihood of buying insurance based on differences in each of these dimensions. For example, we find that individuals are much more likely to purchase private longterm care insurance if they place a higher value on money when sick versus money when healthy (i.e., state-dependent preferences), if they report a stronger bequest motive, if they believe they are more likely to need care, if they place a stronger emphasis on the avoidance of burdening their families with care provision, prefer care to be given by professionals, and believe premiums are appropriately priced given the care they provide. Individuals are much less likely to purchase private insurance if they believe their family is likely to take care of them, if they are concerned about affordability of insurance, if they are more concerned about counter-party risk, or that they insurance company might deny legitimate claims or raise premiums in the future.

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