Abstract

This study assesses the impact of financial literacy on private long-term care insurance coverage as one potential explanation of the small size of the private insurance market.

Findings from the 25 recent literature suggest that financial literacy has a significant effect on a number of individual financial decisions. The analysis uses the SHARE dataset that contains rich information on demographic, health and socioeconomic characteristics of the elderly in Europe. More importantly, SHARE also contains information on current private insurance coverage and measures of current and past financial literacy levels. To account for the potentially endogenous relationship between insurance coverage and financial literacy an instrumental variables approach is used.

Preliminary evidence indicates that financial literacy is important and those with more advanced knowledge are more likely to hold private insurance. The robustness of this result will be checked against different specifications of the model.

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