Combining life insurance and health insurance

Why not internalize the relevant externalities by bringing the two together?:

We estimate the benefit of life-extending medical treatments to life insurance companies. Our main insight is that life insurance companies have a direct benefit from such treatments because they lower the insurer’s liabilities by pushing the death benefit further into the future and raising future premium income. We apply this insight to immunotherapy, treatments associated with durable gains in survival rates for a growing number of cancer patients. We estimate that the life insurance sector’s aggregate benefit from FDA-approved immunotherapies is $9.8 billion a year. Such life-extending treatments are often prohibitively expensive for patients and governments alike. Exploiting this value creation, we explore various ways life insurers could improve stress-free access to treatment. We discuss potential barriers to integration and the long-run implications for the industrial organization of life and health insurance markets, as well as the broader implications for medical innovation and long-term care insurance markets.

That is from a recent article by Ralph S J Koijen and Stijn Van Nieuwerburgh in the May 2020 QJE.  Here are ungated versions of the same paper.  And here is Robin’s related idea from 1994.


With zero interest rates, there's no benefit to pushing the life insurance payment out into the future. There are certain to be lots and lots of expensive medical bills, and the cost of those is certain to rise. Better to off the person as soon as their medical bills exceed their premiums.

That's an interesting idea. Do interest rates correlate to Americans' satisfaction with their healthcare?

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Thank for finally talking about >Combining life insurance
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There’s still a benefit if they’re earning a spread over the liabilities by investing in things such as corporate credit. Also if the duration of their liabilities is longer then the insurers can invest in more equities.

A funding rate of 2% over treasuries for 30 years is more valuable than a funding rate of 2% over for 20 years.

Yes, let's combine parts of our bloated finance sector with our bloated healthcare sector. Synergy!

You are too late! There is already an entire market in bundling life insurance policies. Many old people can't be bothered keeping up the payments, so there are people who buy them, pay the installments, and then package them into a tranche and sell them on.

This sounds to be getting close to what used to be charmingly called "dead peasant" life insurance, which IIRC is no longer legal.

It's employers insuring employees. And it's still legal if the employer obtains the employee's permission. It just can't be done without their knowledge or consent.

Handing out Metformin probably would be a way cheaper option to those insurance companies.

Roughly half of life insurance is now annuities. Not sure I like the implications for those products!

Life insurance is about survivor benefits. It's fine to talk about how to optimize those for paying customers, for the affluent. But in a humane society, I think *basic* survival benefits are for all, and not those who paid for the smart or lucky commercial plan.

to;dr - Don't work too hard at private solutions to public problems.

That's what Social Security is for. The full name is Old Age and Survivor Insurance, and the survivor part is a bigger fraction of the total bill than you'd think. (We've all heard about the last Civil War widow who died in 2008 still collecting a soldier's pension earned in 1865. It is obviously an extreme example, but the benefit liability from a someone's year of work at a young age can stretch out almost forever, even in more normal circumstances.)

The last person collecting a civil war pension, a veteran's daughter named Irene Triplett, died just last month.

PEAK VIRUS: USA reports 55,000 cases in single day...

It's a hoax. There is no virus. The people in the ICU are crisis actors paid by Soros.

I assume what's implied here is that the life insurance benefit payable upon death would be reduced by the health insurance benefit received during life. That presents an interesting dilemma for the family of the person who is insured as well as for the insured. It's analogous to Republican proposals to "prepay" social security benefits (i.e., cut future benefits) by benefits paid earlier (such as benefits paid during the pandemic). An argument against this scheme is that is would leave the retired person without adequate social security benefits later in life, forcing him into poverty or into receiving public welfare, something social security was intended to avoid. I suppose the drawback of the scheme described in this blog post is that it might leave the insured's survivors (e.g., widow and children) without adequate resources, resulting in the same fate (poverty or public welfare) for them.

It would make more sense to tie the life insurance payout into the medical costs that occur at end of life. That is to say, you pay the premiums for several years/decades in expectation that the insurer will cover most or all of your costs in your final years when healthcare is at its most expensive.

On the one hand, this works because older patients have the highest costs and are less likely to need life insurance in its intended function, whereas those who die young and unexpectedly are less likely to rack up years of procedures, long-term care, etc.

On the other hand it's functionally the same as an HSA.

It would be interesting to know what effect this arrangement would have on premium structures.

This would require some very careful underwriting.

There are, or at least were, some Long Term Care policies sold with Life Insurance features. Of course, Long Term Care policies have been a disaster for almost all the issuing carriers, driving a number out of business.

"Long Term Care policies have been a disaster for almost all the issuing carriers": I understand that those firms that tried out the idea in Britain gave up, unable to make a living from it.

It's great pity because on the face of it the problem is indeed well suited to an insurance solution.

Yes. The underlying problem is that when properly underwritten, the premium cost is so high that few people will buy it. The slice of people who can afford realistic premiums, but don't have enough assets to self-insure, is not that large.

A family member had it, and collected the full 3 year coverage, which almost exactly covered her time in Assisted Living and Memory Care. A few months before the end of her coverage, the carrier went into receivership.

A buyer would have to think thrice about buying a product with so many failed carriers, when the whole point is coverage 20+ years down the line, often when's the buyer is no longer really able to be making financial decisions.

I would assume the issue was open ended coverage, and the insurance carrier had no way of knowing that the costs would balloon out of control 20 years down the road.

Wouldn't the obvious solution be a capped pay out? Or maybe a filtered payout? Such as the Insurer only pays for costs that exceed X up to an amount Y not to exceed Z years. (Where Z is a large number but protects against radical technological change).

On the other hand, maybe nobody buys policies like that?

It's more or less what life insurance does. But as I said it can also be approximated with an HSA.

Payouts are normally (every case I've ever looked at) capped. Its usually $X per month for N months, with N typically 36, which is about the usual need for long term care. For extra dollars, some policies offer an inflation rider, where X increases by 3, 4, or 5% per year.

The underwriting made assumptions about longevity and the percentage of people who would stop paying premiums at some point. People lived longer, and fewer stopped paying premiums.

So the underwriters assumed people would stop paying the premiums before they needed the insurance? That sounds like they were idiots.

But health insurance companies already have incentives to encourage doctors and patients to choose cost effective treatments (fire and flood insurance companies to discourage building in fire and flood-prone areas) and they do not appear to do so. Why would life insurance companies be any better?

The health insurance company’s incentives to spend money early to avoid paying later is blunted by the possibility that the client will change their health insurance carrier. [Whole] life insurance is usually a lousy investment, but it does builds up some cash value and therefore the client would not be able to take the savings achieved by preventive care elsewhere.


Most people live past retirement age and at that point they're going on Medicare (though with a Medigap policy) and they drop their life insurance, and maybe at most purchase a small funeral payments policy. So a life/health insurance issuer would have a strong incentive to make sure the insured reached retirement age and his beneficiaries never cashed in on the life component.

"So a life/health insurance issuer would have a strong incentive to make sure the insured reached retirement age and his beneficiaries never cashed in on the life component."

The cheapest Term policies require a basic medical examination.

The customers who pass the medical exam (and paperwork) are most likely going to live to 65. The Term policies expire before death becomes a significant factor. So, the premiums can be extremely cheap.

This resource flow to internalize the externalities is being used by health insurance plans to get members to use their gym memberships. Many HMO’s will pay $25/mo toward the membership fee if their member goes to work out twelve times in a month. The numbers must indicate that $25 purchases better health.

But what about a hybrid purchase? Could a scenario where part of the benefit is internalized within the group and part of the benefit is traded to another group help incentivize beneficial behavior?

Term Life has the one characteristic where the market could have solved the pre-existing condition issue. When you buy term life, you can lock in the price for a term of years, no matter how much your health changes. But with health insurance pre- or outside of the ACA, there's no way to protect yourself from the fact that the pricing can change (or worse, you can be denied) from year to year as your health changes. It's like buying fire insurance where you might be up for renewal as your house is burning down.

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