More than one-third of individuals with long-term care policies at age 65 will let their policies lapse before death. By doing so, they will forfeit the benefits they have previously paid for. These lapses most commonly occur due to financial considerations or a decline in cognitive abilities.

According to a study by the Center for Retirement Research at Boston College, these financial lapses are not surprising. To the extent that premiums rise over time and/or a person’s financial situation worsens, policies may be dropped. At same time, the rate of lapses is inversely related to wealth. Those whose wealth ranks at the 75th percentile are 2.7 percentage points less likely to let their long-term care policies lapse then those whose wealth ranks at the 25th percentiles. Those whose income ranks at the 75th percentile are 4.2 percentage points less likely to let their long-term care policies lapse than those whose income ranks at the 25th percentile.

Similarly, those with higher cognitive scores have lower lapse rates. Individuals with cognitive scores ranking in the 75th percentile are less likely to allow their policies to lapse than those with scores in the 25th percentile by a margin of 3.4 percentage points.

The data on cognitive scores is noteworthy because there is a significant difference between use of long-term care and letting a policy lapse. Nearly a quarter (23%) of individuals who used long-term care between 2006 and 2012 let their long-term care policies lapse during the preceding four-year period. In contrast, just 16% of non-care users let their policy lapse.

The researchers attribute the difference between the use of long-term care and letting a policy lapse to a decline in cognitive abilities. Though there is only a correlation between cognitive scores and policy lapses, there is a stronger link between cognitive impairment and the use of long-term care. Furthermore, among the primary signs of cognitive impairment is the inability to properly manage one’s finances.

Allowing a long-term policy to lapse has two primary financial implications. First, the potential benefits from having the long-term care policy are lost. Secondly, money spent on premiums is forfeited with no chance of receiving.

Source: “Why Do People Lapse Their Long-Term Care Insurance?,” Wenliang Hou, Wei Sun and Anthony Webb, Center for Retirement Research at Boston College, October 2015.

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