Effects of long-term care insurance on financial well-being

  • Jing DongEmail author
  • Fabrice Smieliauskas
  • R. Tamara Konetzka


Although private long-term care insurance (LTCI) is often discussed as a potential solution to the need for long-term care financing in the U.S., there is little empirical evidence on the economic consequences of having LTCI. We use U.S. Health and Retirement Study data to examine how LTCI affects key financial outcomes of insured individuals. Using an instrumental variable approach to account for the endogeneity of LTCI purchase, we find that LTCI leads to consistently positive effects on assets, consistently negative effects on Medicaid and Food Stamp enrolment and parent–child financial transfers, and ambiguous effects on out-of-pocket medical payments. These results suggest that although private LTCI does not entirely protect insured individuals against large medical expenditure, it improves the general financial well-being of insured individuals, potentially by reducing Medicaid-related disincentives to asset accumulation, motivating individuals to save more and reduce intergenerational wealth transfers.


Long-term care insurance Financial protection Asset accumulation Instrumental variables 


  1. Angrist, J.D., G.W. Imbens, and D.B. Rubin. 1996. Identification of causal effects using instrumental variables. Journal of the American Statistical Association 91 (434): 444–455. Scholar
  2. Baer, D. 2001. State taxation of social security and pensions in 2000. Washington, D.C.: AARP Public Policy Institute.Google Scholar
  3. Bassett, W.F. 2007. Medicaid’s nursing home coverage and asset transfers. Public Finance Review 35 (3): 414–439. Scholar
  4. Basu, A., and N.B. Coe. 2017. 2SLS vs 2SRI: Appropriate methods for rare outcomes and/or rare exposures. Health Economics. Scholar
  5. Brown, J.R., and A. Finkelstein. 2004. The interaction of public and private insurance: Medicaid and the long-term care insurance market. Working Paper No. 10989. National Bureau of Economic Research. Retrieved from
  6. Brown, J.R., and A. Finkelstein. 2007. Why is the market for long-term care insurance so small? Journal of Public Economics 91 (10): 1967–1991.CrossRefGoogle Scholar
  7. Centers for Medicare and Medicaid Services. 2008. Transfer of assets in the Medicaid program. MD: Baltimore.Google Scholar
  8. Coe, N.B., G.S. Goda, and C.H. Van Houtven. 2015. Family spillovers of long-term care insurance. Working Paper No. 21483. National Bureau of Economic Research. Retrieved from
  9. Congressional Budget Office. 2013. Rising demand for long-term services and supports for elderly people. Washington, DC: Congressional Budget Office.Google Scholar
  10. De Nardi, M., E. French, and J.B. Jones. 2010. Why do the elderly save? The role of medical expenses. Journal of Political Economy 118 (1): 39–75. Scholar
  11. Edwards, B., and S. Wallace. 2004. State income tax treatment of the elderly. Public Budgeting & Finance 24 (2): 1–20. Scholar
  12. Efron, B. 1981. Nonparametric estimates of standard error: The jackknife, the bootstrap and other methods. Biometrika 68 (3): 589–599. Scholar
  13. Finkelstein, A., and K. McGarry. 2006. Multiple dimensions of private information: Evidence from the long-term care insurance market. American Economic Review 96 (4): 938–958. Scholar
  14. Genworth Financial. 2014. 2014 Cost of care survey. VA: Richmond.Google Scholar
  15. Goda, G.S. 2010. The impact of state tax subsidies for private long-term care insurance on coverage and Medicaid expenditures. Working Paper No. 16406. National Bureau of Economic Research. Retrieved from
  16. Greenhalgh-Stanley, N. 2015. Are the elderly responsive in their savings behavior to changes in asset limits for Medicaid? Public Finance Review 43 (3): 324–346.CrossRefGoogle Scholar
  17. Gruber, J., and A. Yelowitz. 1999. Public health insurance and private savings. Journal of Political Economy 107 (6): 1249–1274.CrossRefGoogle Scholar
  18. Hubbard, R.G., J. Skinner, and S.P. Zeldes. 1995. Precautionary saving and social insurance. Journal of Political Economy 103 (2): 360–399.CrossRefGoogle Scholar
  19. Imbens, G.W., and J.D. Angrist. 1994. Identification and estimation of local average treatment effects. Econometrica 62 (2): 467–475. Scholar
  20. Konetzka, R.T., D. He, J. Dong, M.J. Guo, and J.A. Nyman. 2017. Moral hazard and long-term care insurance. Working Paper.Google Scholar
  21. Kopecky, K.A., and T. Koreshkova. 2014. The impact of medical and nursing home expenses on savings. American Economic Journal: Macroeconomics 6 (3): 29–72. Scholar
  22. Li, Y., and G.A. Jensen. 2011. The impact of private long-term care insurance on the use of long-term care. Inquiry: The Journal of Medical Care Organization, Provision and Financing 48 (1): 34–50.CrossRefGoogle Scholar
  23. McGuire, T.G. 2011. Demand for health insurance. In Handbook of Health Economics, vol. 2, ed. Mark V. Pauly, Thomas G. McGuire, and Pedro P. Barros, 317–396. New York: Elsevier.Google Scholar
  24. McNichol, E.C. 2006. Revisiting state tax preferences for seniors. Washington, D.C.: Center on Budget and Policy Priorities.Google Scholar
  25. Mor, V., J. Zinn, J. Angelelli, J.M. Teno, and S.C. Miller. 2004. Driven to tiers: Socioeconomic and racial disparities in the quality of nursing home care. The Milbank Quarterly 82 (2): 227–256. Scholar
  26. Norton, E.C., and C.H. Van Houtven. 2006. Inter-vivos transfers and exchange. Southern Economic Journal 73 (1): 157–172. Scholar
  27. Nyman, J.A. 2003. The theory of demand for health insurance. Stanford, CA: Stanford University Press.Google Scholar
  28. Pauly, M.V. 1968. The economics of moral hazard: Comment. The American Economic Review 58 (3): 531–537.Google Scholar
  29. Pauly, M.V. 1990. The rational nonpurchase of long-term-care insurance. Journal of Political Economy 98 (1): 153–168.CrossRefGoogle Scholar
  30. Penner, R.G. 2000. Tax benefits for the elderly. Occasional Paper No. 5. Washington, D.C.: The Urban Institute.Google Scholar
  31. RAND Center for the Study of Aging. 2014. RAND HRS longitudinal data file 2014 (V2), supported by NIA and SSA. Retrieved September 2, 2015, from
  32. Snell, R. 2011. State personal income taxes on pensions and retirement income: Tax year 2010. Denver, CO: National Conference of State Legislatures.Google Scholar
  33. Snell, R., and B. Waisanen. 2009. State personal income taxes on pensions and retirement income: Tax year 2008. Denver, CO: National Conference of State Legislatures.Google Scholar
  34. Sperber, N.R., C.I. Voils, N.B. Coe, R.T. Konetzka, J. Boles, and C.H. Van Houtven. 2014. How can adult children influence parents’ long-term care insurance purchase decisions? The Gerontologist 57 (2): 292–299. Scholar
  35. Terza, J.V., A. Basu, and P.J. Rathouz. 2008. Two-stage residual inclusion estimation: Addressing endogeneity in health econometric modeling. Journal of Health Economics 27 (3): 531–543. Scholar
  36. Thompson, L. 2004. Long-term care: Support for family caregivers (Issue Brief). Georgetown University.Google Scholar
  37. Waidmann, T., and K. Liu. 2006. Asset transfer and nursing home use: Empirical evidence and policy significance. Washington, DC Kaiser Family Foundation. Retrieved from
  38. Zeckhauser, R. 1970. Medical insurance: A case study of the tradeoff between risk spreading and appropriate incentives. Journal of Economic Theory 2 (1): 10–26. Scholar

Copyright information

© The Geneva Association 2018

Authors and Affiliations

  • Jing Dong
    • 1
    Email author
  • Fabrice Smieliauskas
    • 2
  • R. Tamara Konetzka
    • 2
  1. 1.IMPAQ InternationalColumbiaUSA
  2. 2.The University of ChicagoChicagoUSA

Personalised recommendations