Three Essays on Long-Term Care and Life Insurance

TitleThree Essays on Long-Term Care and Life Insurance
Publication TypeThesis
Year of Publication2009
AuthorsHe, D
Date Published2009
UniversityWashington University
CitySt. Louis, Missouri
KeywordsHealthcare, Insurance

This dissertation consists of three essays on long-term care and life insurance. Essay 1 examines the impact of the tax incentive prescribed in the Health Insurance Portability and Accountability Act of 1996 (HIPAA) on individuals' long-term care (LTC) insurance purchasing behavior. 1 Using data from the Health and Retirement Study, we find that the tax incentive in HIPAA increased the take-up rate of private LTC insurance by 3.3 percentage points, or 25%, for those eligible. Despite this seemingly strong response, our results imply that even an above-the-line tax deduction would not increase the coverage rate of seniors beyond 13%, indicating that tax incentives alone are unlikely to expand the market substantially. We also present, to our knowledge, the first estimate of the price elasticity of demand for LTC insurance of around -3.9, suggesting that demand is highly elastic at the current low ownership rate. Finally, we evaluate the net fiscal impact of the tax incentive and find that the tax deductibility of LTC insurance premiums leads to a net revenue loss for the government, as the reduced tax revenue from granting the tax incentive exceeds the savings in Medicaid's LTC expenditures. Essay 2 finds evidence for the presence of adverse selection in the life insurance market, a conclusion contrasting with the existing literature. In particular, I find a significant and positive correlation between the decision to purchase life insurance and subsequent mortality, conditional on risk classification. Individuals who died within a 12-year time window after a base year were 19 percent more likely to have taken up life insurance in that base year than were those who survived the time window. Moreover, I find that individuals are most likely to obtain life insurance four to six years before death. Methodologically, I address sample-selection and omitted-variables issues overlooked in the previous literature. In Chapter 3, I examine whether dynamic adverse selection prevails in the life insurance market and finds little evidence of it. In particular, I find that individuals with lower mortality risk do not have a higher lapse rate than do otherwise equivalent individuals with higher mortality risk, nor do they lapse a higher amount conditional on a cancellation. The absence of dynamic selection in life insurance markets appears to imply that adequate premium front-loading may serve as an effective consumer lock-in mechanism in long-term insurance markets.

Endnote Keywords

Long-Term Care

Endnote ID


Short TitleThree Essays on Long-Term Care and Life Insurance
Citation Key6332