Research study finds low potential demand for long-term care insurance

Long-term care insurance is notoriously slow to catch on. A research study has found that this product may interest only 25 per cent of the population.

Pierre-Carl Michaud, professor in the department of applied economics at HEC Montréal, conducted the study for the Industrial Alliance Research Chair on the Economics of Demographic Change, together with colleague Martin Boyer, among other authors. Marchand outlined the findings to The Insurance and Investment Journal. 

Although the long-term care (LTC) insurance market is creating new business opportunities for the industry, only a small proportion of people in Quebec and Ontario could find this coverage appealing, Michaud says. Demand for long-term care insurance products corresponds to about 25 per cent of the population. Although the need for such care is a concern for the vast majority of people, “much education needs to be done and there are major implications for public policies,” Michaud says.

Anti-selection

The risk of spending the end of life in a specialized institution that provides personal care is very far from the minds of individuals who still have many years in the workforce ahead of them. As a result, LTC insurance is not an easy sell. 

When clients express an interest in this product, generally as they near retirement, insurers may assume that the clients are probably aware of their health status. This makes the risk more likely to materialize. 

“When we do more advanced econometric analyses to identify the problem of anti-selection, we notice that it pushes the equilibrium demand by about three percentage points. Even if we would solve this problem, it would not make a big difference, contrary to what some people expect,” Michaud points out.

The main reason for purchasing this policy is to leave money to loved ones, he adds. Potential clients do not want their family to have to cover their high healthcare expenses. 

The demand for long-term care insurance is lower among home-owners. “That’s to be expected. The home becomes a type of insurance. If people need to go to a long-term care institution, they can sell their home” and use the capital gain to finance their new needs, he explains. 

Supply shortage

The researchers asked the participants to state the main reason for their lack of interest in long-term care insurance. More than half of the sample replied that it was never offered to them or they had never heard about it. 

One explanation may be that the product is not offered simply because advisors know that customer demand is minimal. If advisors have only 30 minutes to talk with their clients, they will probably prefer to offer them other types of insurance and savings products. 

Today, in Quebec, a private room in a long-term care residence costs about $2,100 per month, or slightly more than $25,000 per year. For people without pension plans, government benefits would cover a significant amount of this. The remaining amount that would be drawn from personal savings would be fairly small.

“Of course for those without means, the contribution required decreases. If people are only receiving government benefits, the amount charged by the care centre is adjusted accordingly,” Michaud adds.

As a result, people earning very low income, along with the very rich, are not interested in long-term care insurance. Retired workers who qualify for a pension plan think that they will be able to pay for their care through their retirement income, such as an annuity. 

The remaining potential clients are those who have accumulated savings or assets, but whose main goal is to bequeath them to their loved ones. “These people may have no employer plan but have sizable assets. They tell themselves that if they have to pay $25,000 per year for two or three years, they would prefer not to eat into their assets, and want to leave their children more.” This makes for a very narrow potential market, Michaud says.