Many people will end up needing assistance with daily activities like bathing, eating, and dressing as they age. These long-term care services can be costly — a private room in a nursing home costs close to $8,000 a month on average.  To cover these costs, some people buy long-term care insurance. But a new study published in the Journal of Risk and Insurance finds that many people let their policies “lapse” — meaning they stop paying their premiums and the policy is canceled.
Among long-term care policies issued from 1992 to 1996, 25.9% lapsed after 5 years, and 41.1% lapsed after 15 years. Current lapse rates are lower, but are still substantial: Men and women who purchase a policy at age 65 have a 27% and 29% of lapsing their policies before death, respectively. The study finds that lapse rates are especially high among people who are cognitively impaired — meaning that people who are especially likely to need long term care are also especially likely to lose it.
Why do people let their long-term care insurance policies lapse?
The study identified three major reasons people might stop paying their premiums. The first is strategic: People let their policies lapse because they think they won’t end up needing long-term care. The second is a change in financial status, which makes it harder to pay premiums. The third is unintended lapsing.
The study analyzed lapses from 2002 to 2006 using data from the University of Michigan Health and Retirement Study, a long-running survey of more than 20,000 Americans over the age of 50, allowing researchers to track participants over time. It found that lapse rates are “significantly and substantially higher among people with lower cognitive scores.” The study estimates that if everyone with low cognitive scores during the study period had median cognitive scores, lapsing would be 17% less common.