Long-Term Care Insurance

Saving for an event whose occurrence and costs are predictable is very efficient. Preparing for an event involving known financial consequences, however, is not the same as preparing for an unpredictable event with unknown costs. Either too much or too little is likely to be saved. Those who set aside the most that they might need are quite likely to save too much and therefore deprive their families of other goods and services needed over their lifetimes. More than likely, most people would underestimate the costs, thereby depriving themselves of other opportunities, and still not have sufficient resources when care is needed.

Since the future need for long-term care is not known, and since, if needed, its cost is not predictable, self-funding for this contingency is inefficient. Sharing the financial risk through insurance—either public or private—is more efficient. This is the basic function of insurance where large groups of people pool the financial risks of the group. No one person in the group bears the full cost of care and everyone in the group shares in financing the care for those who end up needing it. Despite the existence of long-term care insurance in local markets since the 1960s, relatively few people have purchased long-term care insurance to pool the financial risk of needing long-term care. Since Medicare does not cover most long-term care needs, this leaves most people purchasing their own long-term care and then turning to the state Medicaid program for assistance if impoverished.