Late-in-Life Risks and the Under-Insurance Puzzle

Matthew Shapiro, Joseph Briggs (jsb493@nyu.edu), Christopher Tonetti, Andrew Caplin and John Ameriks
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Andrew Caplin: NYU
John Ameriks: The Vanguard Group, Inc.

No 241, 2016 Meeting Papers from Society for Economic Dynamics

Abstract: Individuals face significant late-in-life risks, including potential long-term care (LTC) needs. Yet they hold little corresponding insurance (LTCI). We investigate the degree to which a fundamental lack of interest, poor product features, and possible behavioral factors determine low LTCI holdings. We estimate a rich set of individual-level preferences and use a life-cycle model to find that ideal insurance would be far more widely held than are products in the market. We find that flaws in existing products provide only a partial explanation for this under-insurance puzzle, with analogous findings for the gap between estimated and actual annuity holdings. Our results derive from ``strategic survey questions'' that identify preferences as well as stated demand questions.

Date: 2016
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