IS PRIVATE LONG
LONG-- TERM CARE
INSURANCE AFFORDABLE FOR OLDER
ADULTS?
NAYOUNG KIM & GAIL JENSEN SUMMERS
INSTITUTE OF GERONTOLOGY & DEPT. OF ECONOMICS
WAYNE STATE UNIVERSITY
JUNE 2009
BACKGROUND



Few adults p
purchase LTC insurance;; nationwide,, fewer
than 7 million LTC policies currently in force
Explanations previously offered for the non-purchase
LTC insurance:
i
• Misperceptions that Medicare already covers LTC
• Availability of Medicaid after own resources run out
• Beliefs that LTC won’t be needed
• Choose to rely on spouse & children instead.
No study has examined whether LTC insurance is simply
“unaffordable” for many older adults.
2
PURPOSE


This study explores whether LTC insurance is
“unaffordable”
unaffordable for many older Americans.
Our definitions of affordability draw on concepts recently
developed to gauge the affordability of
• acute-care health insurance among the uninsured:
LTC insurance is affordable if remaining household
income after paying LTC premiums is above a
certain threshold, e.g., enough to live on.
• housingg amongg ppotential home owners:
LTC insurance is affordable if premium-income ratio (PIR)
is less than or equal to a certain threshold ratio (M).
3
DATA

Health and Retirement Study (HRS)

Conducted by the Institute for Social Research at the University of
Michigan, surveying more than 22,000 Americans over the age of 50
every two years, HRS ongoing since 1992

The
h target populations
l i
•
•
•
•
Prior to 1998: limited to persons born between 1931 and 1941
Since 1998:
99 new cohorts added everyy few yyears
In 1998, persons born in 1947 or before (age 51 and older) added
In 2004, a supplementary sample added to make the total sample
representative of persons born in 1953 or before (approximately age
51 and older)
4
DATA

RAND HRS
• Created by the RAND Center for the Study of Aging with funding
and supported by the National Institute on Aging (NIA) and the
S i l Security
Social
S
i Ad
Administration
i i
i (SSA)
• Merged file of all waves of the HRS, but limited in scope to key
variables from the core interviews.

HRS and RAND HRS data from wave 7 (2004) used for
this study.
5
NORMATIVE DEFINITION
NORMATIVE DEFINITION OF
AFFORDABILITY
X
Can afford LTC ins.
ins
E
X
Available
income
Cannot afford LTC
ins.
E Socially acceptable
bundle (includes LTC
ins.)
I
I
Affordabilityy is defined as follows:
If Yj – X ≥ cjI, then the non‐holder can afford LTC insurance,
where Yj is household income, X is expenditures on other goods and services, and
I is the quantity of LTC insurance. The price of LTC insurance price is cj.
7
METHODS
1 Lif ti
1. Lifetime Income for a Current Worker:
I
f
C
tW k
Retired
Work 0
Current
R
Retirement year
D
Death (life expectancy)
Expected lifetime income = Working income
Retirement income
TWIt: total working income in year t.
TRIt: total retirement income in year t.
r: real interest rate. 8
2. Lifetime Income for a Current Retiree
Retired
‐R
R
Retirement year
0
Current
D
Death (life expectancy)
Expected lifetime income =
Expected lifetime income =
TRIt: total retirement income in year t
r: real interest rate 9
3. Setting Parameters for these Equations 




Lifetime Household Consumption. We consider 3 different
thresholds
h h ld for
f what
h is
i enough
h to live
li on, defined
d fi d as 1, 2, and
d 3 times
i
the current U.S. poverty standard for respondent’s household,
respectively.
Lifetime Household Premiums. Except for LTC insurance holders
who report their premium, we estimate the premium using the Federal
LTC insurance premium (FLTCIP) calculator.
Life Expectancy. Unless respondent reports their life expectancy, we
estimate
ti t time-to-death
ti
t d th using
i the
th Life
Lif Table
T bl for
f the
th Total
T t l Population,
P
l ti
2004, from National Center for Health Statistics (NCHS).
Expected Retirement Year. Unless respondent reports their
p
retirement yyear,, we assign
g the average
g retirement yyear.
expected
Real Interest Rate. OECD Statistical Profile of the U.S. in 2004 is
used.
10
RATIO DEFINITION
RATIO (SHARE(SHARE - OFOF - INCOME)
DEFINITION OF AFFORDABILITY
Y
A
p
q
O
•
•
•
p : can afford
q : cannot afford
I
Households use part of their income Y to buy LTC insurance I
OA shows the minimum income buys a certain level of LTC insurance
without spending
p
g more than the p
proportion
p
M,, some limit,, of that
income.
LTC insurance is affordable if the share-of-income (SOI) is less than or
equal to the threshold (M):
12
How different is this second
definition from the first one?

Julie is a 7
72-year-old
y
retiree
• Lifetime income: $740,520.62
• Lifetime consumption: $473,642.30
•
(difference = $266
$266,878,32)
878 32)
Lifetime LTCI premium: $76,799.52
• Def 1: $266,878,32 > $76,799.52 (affordable)
• Def 2: $76,799.52/ $740,520.62 = 0.10 > 0.05 (unaffordable)
13
METHODS

According to Health Insurance Association of America (HIAA) survey, households spent on average 4.8% of their income h
h ld
4 8% f h i i
on LTC insurance premiums in 2000 (down from 6 percent in 1995).
• Initially, set M at 0.05. If
•
then, LTC insurance is affordable for the household.
We also examine two alternative share-of-income thresholds, 3
percentt and
d 7 percent,
t tto see whether
h th th
the fi
findings
di
are sensitive
iti
to the level of threshold.
14
RESULTS
Table 1: Income Distribution of Older Adults
Annual Household Income by Age, 2004
Age Income
Less than $5,000- $25,000$5,000 $24,999 $49,999
$50,000$99,999
$100,000
or more
51-60
4.7%
18.8%
22.4%
30.7%
23.4%
61-70
61
70
2.7
33.1
29.7
21.9
12.7
71-80
0.9
48.2
31.6
14.0
5.4
81 90
81-90
25
2.5
61 3
61.3
25 4
25.4
86
8.6
22
2.2
90 or over
4.6
71.8
16.5
5.6
1.5
Source: RAND HRS. Sample size: 12,558.
16
Table 2: Poverty Thresholds in 2004
Size of family unit
Thresholds
(no child)
One person
Under 65 years
$9,827
65 years and older
9 060
9,060
Two persons
Householder under 65 years
12,649
Householder 65 years and older
11,418
Source: U.S. Census Bureau.
17
Table 3: LTC Provisions Used for Simulations
Policies 1 through 4 Ordered from Least to Most‐Generous
Policies 1 through 4 Ordered from Least‐
to Most Generous
Policy 1
Policy name
Benefits
Policy 2
Policy 3
Policy 4
Comprehensive Comprehensive Comprehensive
Fac100
100
150
150+
Facility- and
Facility- and
Facility- and
Facility-based
Facility
based
home-based
home-based
home-based
care
care
care
care
Inflation
protection
No
No
Yes
Yes
Benefit period
3yrs
3yrs
5yrs
Unlimited
Waiting period
90days
90days
90days
90days
Daily
il b
benefit
fi
$
$100.00
$
$100.00
$
$150.00
$
$150.00
18
Table 4: LTC Monthly Premiums
Examples of Monthly Premiums in 2004 by Policy Type and Age
Age
Policy 1
Policy 2
Policy 3
Policy 4
60
$27.80
$40.60
$93.20
$231.59
70
63.20
86.80
154.40
379.20
80
190.79
258.60
369.19
913.80
90
412.04
558.21
732.07
1811.26
Source: Calculated using rates paid by federal employees under the Federal Long Term Care Insurance Program.
19
Table 5: Percentage
g Who Can Afford Policyy 1 or 2
by Age Using First Definition of Affordability
2 times
poverty
level
3 times
poverty
level
Policy
Age
Poverty
level
Policy 1
51-60
61-70
87.7%
86.4
74.4%
65.8
60.3%
46.8
71-80
71
80
85.0
85
0
86.4
87.4
85 6
85.6
57.6
57
6
66.3
74.0
64 9
64.9
36.4
36
4
48.2
60.1
46 2
46.2
82.8
85.4
55.3
65.1
35.2
47.5
Total
Policy 2
51-60
61 70
61-70
71-80
Total
Source: Author’s calculation based on RAND HRS.
Sample size: 12,558.
20
Table 6: Percentage
g Who Can Afford Policyy 3 or
4 by Age Using First Definition of Affordability
Policy
Age
Policy 3
51-60
61-70
71-80
Total
Policy 4
Total
51-60
61-70
71-80
Poverty
level
2 times
poverty
level
3 times
poverty
level
86.0%
83.5
78.0
82.8
83.2
74.8
57.6
72.1
72.8%
61.9
51.1
62.4
69.5
53.9
36.3
59.9
59.0%
44.1
32.6
45.6
55.6
38.6
23.7
39.8
Source: Author’s calculation based on RAND HRS.
Sample size: 12,558.
21
Table 7: Percentage Who Can Afford Policy 1 or 2
b Age
by
A Using
U i Second
S
dD
Definition
fi i i off Aff
Affordability
d bili
Less than Less than Less than
LTCI Policies
P li 1
Policy
Total
Policy 2
AGE
3% of
5% of
7% of
income
income
income
85.0%
8
%
47.8
10.5
40 0
40.0
77.6
33.8
53
5.3
32.0
92.8%
8%
69.5
25.9
53 3
53.3
87.0
55.4
15 1
15.1
44.3
95.3%
%
81.9
40.7
62 2
62.2
92.1
69.3
26 8
26.8
53.3
51-60
6
61-70
71-80
51-60
61-70
71 80
71-80
Total
Source: Author’s calculation based on RAND HRS.
Sample
p size: 12,558.
,55
22
Table 8: Percentage Who Can Afford Policy 3 or 4
b Age
by
A Using
Usi Second
S
d Definition
D fi iti off Affordability
Aff d bilit
Less than Less than Less than
LTCI Policies
Policy 3
Total
Policy 4
Total
AGE
51-60
51
60
61-70
71-80
51-60
61-70
71-80
71
80
3% of
5% of
7% of
income
42 4%
42.4%
11.5
1.9
14 9
14.9
12.5
2.4
03
0.3
4.0
income
64 0%
64.0%
25.2
5.0
25 7
25.7
25.9
5.4
11
1.1
8.6
income
75 0%
75.0%
38.9
10.6
34 5
34.5
39.4
10.2
18
1.8
13.7
Source: Author’s calculation based on RAND HRS.
Sample size: 12,558.
23
CONCLUSIONS
• Lack of affordability explains why the LTC
insurance market is small.
small
• This statement applies using either a
normative definition or a share-of-income
share of income
definition for affordability.
• Affordability drops dramatically for adults
in their 60s and 70s, especially for policies
with an inflation protection provision.
provision
• To be affordable LTC insurance needs to
be taken out prior to age 60.
60
• Using our first definition, and 2-3 times
the poverty level as a gauge for “other
spending”
d ” after
f buying
b
a LTC policy:
l



Even the least generous policy is unaffordable for 25-40% of
5
adults in their 50s.
This same policy is unaffordable for 35-53% of adults in their
60s.
Using our second definition,
definition and 3-5% as
a reasonable share-of-income limit:
• Policies with inflation protection are unaffordable for the
•
majority of older adults.
Even among early purchasers, i.e., adults in their 50s, 36-58%
cannot afford an inflation-protected policy.
25
NEXT STEPS IN THIS PROJECT
More definitions are being developed for
affordability and applied to the data.
 The outcomes from alternative definitions
will be compared and contrasted, so that
more general conclusions can be reached
regarding the role of affordability in
explaining non-purchase.
non purchase

26
Th k you
Thank