The role of the health effect in estimating the willingness to pay for long-term care insurance

Abstract Having long-term care insurance (LTCI) impacts the insured's health status, a phenomenon referred to as the health effect. This paper estimates the willingness to pay for LTCI, utilizing a utility-based model that incorporates the health effect by using an LTCI-dependent health transition matrix. The findings reveal an inverted U-shaped relationship between willingness to pay and level of wealth. Inclusion of the health effect leads to a moderate increase in willingness to pay for the entire population. Notably, the rise in willingness to pay is more pronounced for in-kind benefit programs (which provide direct services) compared to in-cash benefit programs, particularly among women. This suggests a theoretical shift in the preferred LTCI benefit design, as pinned down by imputed willingness to pay—from in-cash benefits (when the health effect is excluded) to in-kind benefits (when the health effect is considered). These findings have important implications for LTCI policy evaluation and design.