Why Do People Lapse Their Long-Term Care Insurance?

Source: Wenliang Hou, Wei Sun and Anthony Webb, Center for Retirement Research at Boston College, IB#15-17, October 2015

The brief’s key findings are:
– More than a third of those with long-term care insurance at age 65 will let their policies lapse at some point, forfeiting all benefits.
– Lapses could be due to the burden of insurance premiums, a strategic calculation that care use is less likely, or poor decisions due to declining cognitive ability.
– The analysis finds support for both the “financial burden” and “cognitive decline” explanations.
– The consequences of lapsing are significant, as lapsers are actually more likely than non-lapsers to use care in the future, partly due to cognitive decline.
– Thus, for some lapsers, having insurance could be counterproductive as they buy it to protect against risk but drop it just when the risk becomes more likely.