EUROPEAN PAPERS ON THE NEW WELFARE

5.4 A combination policy: Example of the trade-off principle

Linking long-term care benefit to life insurance or annuity products already exists in the market; it combines long-term care protection with income protection through life insurance or annuity. For example, with a rider for long-term care, a life insurance policy pre-pays the death benefit for long-term care expenses. If the insured does not need long-term care, then the funds in the insurance policy (such as universal life or variable universal life) continue to grow. Stated differently, unused long-term care benefits will pass to the beneficiaries of the policy. Under this arrangement, in essence, the policyholder trades off some or all of the death benefit for long-term care.
Providing a long-term care rider to a life insurance policy could also reduce, if not eliminate, the moral hazard problem: there would be a built-in resistance to over-using long-term care benefits because that would reduce the eventual insurance proceeds. The adverse selection problem could be limited, too, because such a combination product would appeal to both healthy and not-so-healthy people. The high cost issue could also be moderated, in addition, because people could buy long-term care insurance coverage at younger ages.

6. Concluding Remarks: Why an Intragenerational Funding Model?

The SS/LTC plan is predicated on what may be called an intragnerational funding model. Why should there be such a new approach?
Lower fertility rate and increasing longevity have raised concerns that the costs of pensions and health care for the elderly might someday outstrip the willingness and capacity of the working population to pay. This issue is faced by the intergenerational approach to funding pensions and health care, exemplified by the traditional social insurance programs.
Promoting individual responsibility by encouraging personal saving can only go so far. People may still outlive their resources by underestimating their life expectancy. Or people may not be able to save sufficiently for old age owing to their experiences with unemployment, illnesses, or disability during working years or because of expenses caused by illnesses and disability of their family members.
One promising concept is intragenerational (within the older generation) funding approach to risk sharing to supplement the traditional intergenerational funding approach. An intragenerational funding model would spread the risks among members of the older generation from (a) those who live longer to those who do not live as long and (b) those who are healthier (or less dependent) to those who are less healthy (or more dependent). The SS/LTC plan is still a social insurance program that facilitates such a risk pooling.
Some may feel that the risk pool for SS/LTC, based on the current cohorts of Social Security recipients, might not be sufficiently large. However, as the older generation grows in number in the next decades, the risk pool they compose will enlarge commensurately, making it a more viable group for pooling risks. In addition, since older people as a group have in past decades improved their income and wealth positions, including increased home equity, they as a group appear more able to pay for some of the support they need during old age. Further, financial ability of older people could also be expected to increase from continued work, part-time or full-time, owing to better health for at least some members in this group. Lastly, intragenerational risk sharing may lessen concerns about possible intergenerational conflicts because the support for the older generation will fall more on older people themselves so younger people will shoulder lesser burden.

References
Chen, Y.-P. (1993): “A ‘three-legged stool’: A new way to fund long-term care?”, in Care in the Long Term: In Search of Community and Security. National Academy Press, Washington, D.C., pp. 54-70.

Chen, Y.-P. (2001): “Funding long-term care in the United States: The role of private insurance”, Geneva Papers on Risk and Insurance, 26(4), pp. 656-666.

Chen, Y.-P. (2005): Statement on “How to Create a Social Insurance Program for Basic Long-Term Care Coverage,” Hearing on the Retirement Policy Challenges and Opportunities of our Aging Society, Ways and Means Committee, May 19, U.S. House of Representatives, Washington D.C.

Lynn, J. and Adamson, D.M. (2003): Living Well at the End of Life. RAND Health, Santa Monica, CA.

Lynn, J. and Wilkinson, A. (2005): Care Coordination across the Continuum. A White House Conference on Aging Policy Solutions Forum. Coalition for the Continuum of Care, July 19, White House Conference on Aging, Washington D.C.

Mini-Conference on Long-Term Care (2005): Establishing a Comprehensive National Long-term Care Policy. A White House Conference on Aging Mini-Conference. April 19-20, Washington D.C.

Tilly, J. Goldenson, S. Kasten, J. O’Shaughnessy, C. Kelly, R. and Sidor, G. (2000): Long-Term Care Chart Book: Persons Served, Payors, and Spending, 5 May, Congressional Research Service, Washington D.C.

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