Long-Term Care Insurance Decisions

The purchase of long-term care (LTC) insurance is a difficult lifetime choice made in the face of highly uncertain risks, including mortality, morbidity, timing and length of LTC, and portfolio investment risk. Many individuals do not know how to think about this decision properly and, in the face of too much anecdotal and too little objective information, will not proactively decide. We used Monte Carlo simulation modeling with detailed, experience-based distributions for LTC uncertainties and their correlations to project investment growth to death given alternative levels of LTC insurance. Using constant risk aversion, we calculate certainty equivalents for the resulting distributions of final holdings at death. Decisions were separated for male and female individuals and group and individual market insurance opportunities. Sensitivity analysis was conducted varying age, cost of coverage, starting investment amount, risk tolerance, return on portfolio investment, inflation, and length of LTC coverage. Optimality results suggest low levels of coverage or no insurance, with higher use of insurance only for individuals who are young, have low risk tolerance, low starting portfolio amounts, or combinations of these characteristics. While the contribution of this work is to assist individual decision making, it will also be informative to policy makers and insurance companies.