Displaced, disliked and misunderstood: A systematic review of the reasons for low uptake of long-term care insurance and life annuities

Timo R Lambregts,Frederik T Schut

doi:10.1016/j.jeoa.2020.100236

Timo R Lambregts, Frederik T Schut

Open Access

https://doi.org/10.1016/j.jeoa.2020.100236

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Abstract

With aging populations, the role of private insurance in financing late-in-life risks is likely to grow. Yet, demand for long-term care insurance (LTCI) and life annuities (hereafter annuities ) is very limited and lags behind economic projections. This systematic literature review surveys the large number of theoretical and empirical studies analyzing this contradiction. We examine the LTCI and annuity puzzles separately and show which factors limit demand for insurance against both late-in-life risks. Our systematic search rendered 3,945 unique hits and findings of 187 studies were integrated in our analyses. Results hereof suggest that holding of both insurance products is systematically impeded by substitution by social security, adverse selection, nonstandard preferences and limited rationality due to low financial literacy and risk unawareness. Furthermore, insurance holding is concentrated among wealthier and subjectively healthier individuals. A comprehensive approach addressing all four reasons for low uptake may increase insurance holding most effectively and may particularly empower people with lower socio-economic status to make well-informed decisions.

Highlights

Facing aging populations, many developed countries strive to protect against late-in-life risks through policies that ensure adequate elderly care and retirement income
(1) In the protocol, we laid down the following research questions: (i) which factors impact the uptake of long-term care insurance (LTCI)? and (ii) which factors impact the uptake of life annuities? To be included, publications should: 1. be explicitly about private LTCI, annuities and/or combined life care annuities; 2. focus on uptake and/or demand of these products; 3. identify factors that impact demand; 4. be either empirical or theoretical; 5. when empirical, be on high income countries as defined by the
Uptake of both LTCI and annuities is lower for individuals that (i) are eligible for public policies that can substitute for private insurance; (ii) that are subjectively less healthy; (iii) that have lower trust in insurance companies; and (iv) that are less financially literate or risk aware

Summary

Introduction

Many developed countries strive to protect against late-in-life risks through policies that ensure adequate elderly care and retirement income. Private LTCI in France and Germany is generally seen to be more successful (Doty et al, 2015; Rothgang, 2010) In these countries, LTCI is marketed as a supplement to (income adjusted) social insurance policies. The downside is that these are bare-bone policies do not nearly cover the costs of LTC and offer limited relief from pressure on public expenditures. Such meagre policies are viewed to be more marketable. With social security protecting against tail-risks, supplemental policies are both more affordable and less prone to uncertain developments of future LTC costs than more comprehensive insurance products

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