A systematic review of the reasons for low uptake of long-term care insurance and life annuities: Could integrated products counter them?

With aging populations, the role of private insurance in financing long-term care and longevity risks is likely to grow in developed countries. Nonetheless, the demand for
long-term care insurance (LTCI) and life annuities (hereafter annuities) is very limited and lags behind economic projections. A recurrent explanation holds that adverse selection dampens insurance demand. Integrating these products in a life care annuity (LCA) may effectively mitigate such adverse selection. In this Netspar Survey Paper we first analyze which factors impact the demand for LTCI and annuities. Next, we discuss whether LCAs can indeed increase insurance uptake. To do so, we systematically review the large and growing body of theoretical and empirical literature that analyzes LTCI and annuity uptake.

Our results show that similar factors hinder the uptake of both LTCI and annuities. Specifically, we find that uptake is lowered not only by adverse selection, but also by substitution, nonstandard preferences, and limited rationality. Moreover, these factors may also explain why uptake is concentrated among wealthier and subjectively healthier individuals. An integrated product – only focusing on solving adverse selection issues – is unlikely to solve other aspects that limit uptake. Particularly, our results show that uptake for integrated products will likely continue to be concentrated among wealthier and subjectively healthier individuals. However, when insurers are able to cater to country-specific demand-side traits of substitution and nonstandard preferences, this may well increase the uptake of both separate and integrated products.

The fact that uptake of private insurance is unequally distributed has important consequences for policymakers. Insofar as low uptake reflects an active choice to substitute for private insurance or reflects a dislike of private insurance, it echoes individual preferences and requires no action. However, insofar as it reflects adverse selection or limited rationality, lower uptake is a product of underlying inequalities in health, longevity and financial literacy and may warrant policy interventions.

If the goal is to increase insurance uptake in private insurance markets, policymakers and insurers could undertake several actions to create a more inclusive insurance market. First, individuals with low financial literacy should be empowered to make their own insurance decisions. This can be achieved not only by policies that increase financial literacy, to provide for a better understanding of LTCI and annuity products, but also by making insurance decisions easier to comprehend. Second, risk awareness increases insurance uptake; policymakers and insurers could thus focus on raising awareness of LTC and longevity risks. Particularly, governments should be clear as to the scope of social benefits and as to the contribution that is expected from citizens themselves. Third, since our results show that distrust of insurers additionally drives low uptake, regulation that protects insured persons by guaranteeing the payout of fair claims may help to increase uptake. Finally, evidence on the importance of perceptions, framing, and defaults suggests that these may provide effective means for increasing insurance uptake.