Effects of long-term care insurance on financial well-being

Abstract

From a policy perspective, private long-term care insurance (LTCI) is often discussed as a potential solution to the need for long-term care (LTC) financing. However, given that financial protection is arguably the primary purpose of health insurance, there exists remarkably little empirical evidence on the financial protection effect of LTCI. We use U.S. Health and Retirement Study data to examine how LTCI affects key financial outcomes of insured individuals, including asset accumulation. Using an instrumental variable (IV) approach to account for the endogeneity of LTCI purchase, we find that LTCI leads to consistently positive effects on assets, consistently negative effects on Medicaid and Food Stamps enrollment and parent-child financial transfers, and ambiguous effects on out-of-pocket (OOP) medical payments. These results suggest that although private LTCI is ineffective at protecting insured individuals against large medical expenditures, it improves the general financial well-being of insured individuals by reducing Medicaid-related disincentives to asset accumulation, motivating them to save more and reduce asset transfers.