Arnold Kling  

Long-term Care Insurance

A Puzzle for Human Capital Ext... Me on Middle-Class Jobs...

Jeffrey R. Brown and Amy Finkelstein write,

Between 35 and 50 percent of 65 year-olds will use a nursing home at some point in their remaining lives.

Pointer from Timothy Taylor.

My take on this is that when something has a probability between 35 and 50 percent, it is not an insurable event. Basically, every family needs to save up for long-term care needs in old age. Insurance covers rare events, not events that are this likely.

My wife and I have long-term care insurance. The reason I think that makes sense is that we are not over 65. If one of us should require long-term care in the next several years, that would be expensive. It also is unlikely, at least compared with the probability that we will require long-term care when we are over 75. So it is an insurable event.

In my view, long-term care is an insurable event only for people who are under 65. After that, it becomes a matter of personal saving. Thus, what most people think of as long-term care insurance (covering people over 65) is simply redistribution of wealth from people who save for their old age to people who don't. Thus, it is bound to be undertaken by government rather than the private sector

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COMMENTS (16 to date)
loveactuary writes:

A decent portion of the population will ultimately die, and yet that is considered an insurable event ... I imagine also that 35-50% of the population will use their car insurance to reimburse for an accident at some point in their lives. The largest current struggle for long term care is that so few people are privately insured (

loveactuary writes:

(continued ...)

The largest current struggle for long term care is that so few people are privately insured (less than 5%), leading to a large anti-selection problem. Insureds who have purchased long-term care in the past are a) holding on to the coverage longer than carriers initially anticipated and b) claiming benefits to a greater degree than their premiums initially were priced for. To your point - a greater spread of risk among a larger portion of the population would go a long way towards making this risk more insurable.

Steve Sailer writes:

But there's a high degree of randomness about how long you will need long term care, which makes financial planning difficult.

wd40 writes:

Long-term care insurance typically starts coverage after the first 90 days of long-term care (covered by medicare). Much of the actual long-term care is for a very short time period, but there is a long tail that stretches beyond 10 years (although most people do not get coverage that lasts that long).

Silas Barta writes:

One word: whole life insurance. That insures against a guaranteed event and is affordable. The same model could be used for long-term care.

Lord writes:

Too narrow an understanding of insurance which is as often as not a saving plan.

Daublin writes:

Life insurance works the same way as described for nursing home coverage. Life insurance at age 20 costs next to nothing. Life insurance at age 50 costs a lot, and at age 80 is probably impossible to get.

Thus, life insurance works on a private market younger people, but not for older ones.

Sonic Charmer writes:

Most of what people now call 'insurance' is not (it is stealth redistribution, as you state).

Relatedly, most of what people call 'risk' is not (risk connotes uncertainty; an event likely or highly-likely to occur is not much of a 'risk'). Similarly, when people speak of spreading 'risk' in this context, it is usually spreading wealth they are talking about, i.e. redistribution.

So, someone who wants cheaper-than-cost 'insurance' against the 'risk' that something very-very likely happens to them is really saying (because others wouldn't pay for this voluntarily) that they want other peoples' wealth to be garnished so they can get a service they're very-very likely to need more cheaply than they otherwise would. (If they're not saying that, they'd be content to pay the real cost - but then they wouldn't need 'insurance' in the first place, for what is the point of having 'insurance' where you pay X and receive X.)

Felix writes:

Long-term care insurance should be mandatory for everybody with premiums deducted directly from your paycheck (just like medicare or social security). That way individuals are insured, premiums will be reasonable, and overall welfare is going to increase b/c people don't have to save up tons of money for a really expensive event that may never happen. That is what insurance is for. Germany started requiring long-term care insurance in 1995. AARP published an interesting paper comparing the German and US systems ( Their conclusion is that Germany spends roughly the same fraction of GDP on long-term care; the German system does not require individuals to become impoverished; and it does not present a big burden to tax payers.

Sonic Charmer writes:

The people citing life insurance as a case of insurance against a known event are wrong. The relevant 'event' for life insurance is not [whether you die], it is [whether you die in between times (t1,t2)] for all the various choices of t1,t2 going forward. This event's outcome for many t1,t2's is uncertain, i.e. risky, so insurance against it can make sense, insurance companies can use statistics to build forward profiles of expected payouts and hedge them, etc. (There also may be tax treatment etc. that distorts this market, effectively turning it into something other than pure insurance.)

But there are limits; it makes much less sense to sell an $X life insurance policy to an 110-year-old man for anything less than $X, because that event is much less uncertain, i.e. less risky. No one would offer that insurance for significantly =$X so no transaction would take place. Without, of course, the government stepping in and compelling such a transaction....

Arnold's example (something with 30-50% likelihood, not 99+%) is obviously not this extreme, but it leans in that direction, which I think is the point.

Silas Barta writes:

@Sonic_Charmer: What you're describing is term life insurance. Whole life insurance covers you irrespective of when you die, and is intended to build up to a certain cash value (plus policy dividends) over your lifetime.

In fairness, of course, you can view whole life insurance as a term life policy attached to a savings plan.

Jay writes:

LMAO, whole life insurance policies? You must be an insurance salesman (or whatever euphemism they are using these days). The NPV on those policies is so negative for the consumer they should be deemed a racket.

*The way the insurance company tricks you is by linking the investment plan to what is effectively a rolling term life policy. Every month/quarter/year, the insurance company uses some of the investment plans assets to pay for your premium. Those unable to think critically think, wow it only cost me $X a month out of pocket, when in reality there is $Y a month coming out of the investment account also. Although I have been told there are some interesting tax avoidance schemes with so called whole life insurance policies.

Jay writes:

I might add that insurance company's favorite clients are the ones who pay into a whole life insurance policy starting when they are young, but then forget to make a timely payment in old age, immediately voiding the policy.

The Snob writes:

@ Felix
And the US and germany are demographically comparable, right?

steve writes:

"My take on this is that when something has a probability between 35 and 50 percent, it is not an insurable event. "

Life insurance? 100% of us die.


blink writes:

In a world of strong extended families, self-insurance for long-term care might make sense at that level. I agree with others that high variability makes the percentage statistic misleading. To consider whether insurance can be offered, why not go back to the fundamentals: Are moral hazard and adverse selection especially strong in this area? These problems may well be less meaningful here than elsewhere and so I expect insurance to be provided.

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