LTC insurance from an investor's perspective

This thesis studies long-term care (LTC) insurance from the perspective of an individual investor. The analysis considers a 40-year-old individual who saves and invests until retirement while facing the risk of future dependency-related care costs. The model combines portfolio choice, LTC risk, and insurance in a simulation framework, allowing the individual to choose the optimal allocation between risky and risk-free assets under different insurance regimes. The objective is to understand whether accounting for LTC risk changes optimal portfolio allocation and how much LTC insurance is worth to the individual. The value of insurance is measured through certainty equivalent wealth and the maximum acceptable premium. The analysis also studies the sensitivity of the results to parameter uncertainty, LTC cost assumptions, risky-portfolio composition, and different utility specifications. The results suggest that LTC risk can materially affect portfolio choice, but the direction and magnitude of the effect depend strongly on preferences and insurance coverage. Under CRRA and HARA preferences, LTC risk is mainly evaluated relative to wealth, while under CARA preferences it is evaluated as an absolute monetary shock. This distinction leads to different portfolio and insurance valuation patterns, although some broad mechanisms remain common across specifications. Overall, the thesis shows that LTC insurance and financial investment can behave as partial substitutes, but not as perfect substitutes. Investment allows individuals to accumulate a buffer against future care costs, while insurance provides state-contingent protection against dependency risk. The numerical results are sensitive to the assumptions of the model, but the broader conclusion is that LTC insurance should be evaluated jointly with portfolio choice and with careful attention to how individuals evaluate downside risk.