The role of the health effect in estimating the willingness to pay for long‐term care insurance

Abstract Having long‐term care insurance (LTCI) impacts the insured's health status, a phenomenon referred to as the health effect. This paper estimates the willingness to pay for LTCI, utilizing a utility‐based model that incorporates the health effect by using an LTCI‐dependent health transition matrix. The findings reveal an inverted U‐shaped relationship between willingness to pay and level of wealth. Inclusion of the health effect leads to a moderate increase in willingness to pay for the entire population. Notably, the rise in willingness to pay is more pronounced for in‐kind benefit programs (which provide direct services) compared to in‐cash benefit programs, particularly among women. This suggests a theoretical shift in the preferred LTCI benefit design, as pinned down by imputed willingness to pay—from in‐cash benefits (when the health effect is excluded) to in‐kind benefits (when the health effect is considered). These findings have important implications for LTCI policy evaluation and design.