Does ‘early purchase’ improve the willingness to pay for long-term care insurance?

Abstract

Coverage for long-term care insurance (LTCI) is scant. One common reason analysts refer to is individual's myopia in planning insurance well ahead of need. We attempt to test this by empirically eliciting the willingness to pay for a hypothetical long-term care insurance policy at two different periods of time namely: (a) current respondent time and (b) assuming the respondent is 40. We draw upon data from Spain where no insurance was available at the time of the study. We find that on average only one-fifth of the respondents find LTCI a suitable alternative and that interestingly, the willingness to pay does not seem to change significantly when individuals are at an ‘optimal’ purchasing age. The willingness to pay for LTCI is driven by individual's perceptions of risks conditional on survival instead.

Notes

¹ As in most insurance studies, the probability of experiencing losses is not directly observed and thus risks perception studies are employed to approximate the probability of loss, which is proxied by individual's age, gender and pre-existing conditions (Showers and Shotick, 1994).

² The respondent was provided with a variety of examples of what caused old age disability and its potential consequences before the interview. In describing the hypothetical policy, the question referred to several serious cognitive impairments (such as Alzheimer's disease) including physical impairments such as inability to bathe, prepare meals, etc. However, we cannot guarantee that all participants took into account the same care package in valuing LTC. Furthermore, the question included, although not made explicit, the costs resulting from informal care.