Financial Sophistication and Private Long-term Care Insurance Purchase Decision

Abstract

Despite significant financial risk associated with long-term care expenditure, the market for private long-term care insurance (LTCI) remains severely limited. Understanding the sources of such under-insurance is important to evaluate any potential reforms to strengthen the private LTCI market so that it becomes a significant source of financing long-term care services and supports for the elderly. Considering LTCI as a form of retirement planning, one would expect an individual's financial literacy to affect their LTCI purchasing decision. Implementing an instrumental variable approach, the current study isolates the causal impact of financial sophistication on optimal decision to purchase a private LTCI coverage. Consistent with the literature on retirement planning, results show that individuals with more sophisticated financial knowledge were likely to purchase a private LTCI coverage.