November 17, 2015
Long-term Care Policyholders Who Lapse
In an upside-down aspect of long-term care insurance, about one in four older people with a policy who eventually go into a nursing home had let that policy lapse sometime in the previous four years, forfeiting coverage that would’ve paid for their care.
The questions are who does this and why.
New research by the Center for Retirement Research (CRR) finds two explanations for why: a scarcity of financial resources and cognitive impairment, which limits the elderly’s ability to properly manage their finances, including their long-term care policies.
The researchers found no support for what they call “strategic lapsing” – a deliberate decision to quit paying the premiums by healthy older individuals who, upon reconsideration, conclude that their risk of needing care in the future is low.
When people let their policies lapse, said Anthony Webb, a CRR senior economist and one of the study’s authors, “They not only waste their premiums, they draw down their wealth in the mistaken belief they’ll have insurance to cover them should they go into care.”
The study was based on a nationally representative survey of older Americans, with the analysis limited to 65-year-olds who held a long-term care policy in 2002. The researchers tracked them over the next decade to determine who dropped their policies and whether they later entered a nursing home.
To determine why people lapsed, the researchers tested whether they couldn’t afford the premiums or experienced a sudden worsening in their financial circumstance by estimating probabilities of lapsing for different household incomes and financial assets. They found that people with less income and less assets were more likely to lapse.
Cognitive impairment also played a role: lapsed policies were more common among people with lower scores on cognitive tests. Interestingly, older individuals with a daughter were also less likely to lapse, presumably because she made sure they kept up their premiums.
A second analysis focused on answering the question of who goes into a nursing home. Once again, cognitive impairment was key. Moving from higher to lower scores on cognitive tests increases the risk someone will need care.