Life insurance demand under health shock risk

This paper studies the life cycle consumption-investment-insurance problem of a family. The wage earner faces the risk of a health shock that significantly increases his probability of dying. The family can buy long-term
This paper studies the life cycle consumption-investment-insurance problem of a family. The wage earner faces the risk of a health shock that significantly increases his probability of dying. The family can buy long-term life insurance that can only be revised at significant costs, which makes insurance decisions sticky. Furthermore, a revision is only possible as long as the insured person is healthy. A second important feature of our model is that the labor income of the wage earner is unspanned. We document that the combination of unspanned labor income and the stickiness of insurance decisions reduces the long-term insurance demand significantly. This is because an income shock induces the need to reduce the insurance coverage, since premia become less affordable. Since such a reduction is costly and families anticipate these potential costs, they buy less protection at all ages. In particular, young families stay away from long-term life insurance markets altogether. Our results are robust to adding short-term life insurance, annuities and health insurance.
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Metadaten
Author:Christoph Hambel, Holger Kraft, Lorenz S. Schendel, Mogens Steffensen
URN:urn:nbn:de:hebis:30:3-393053
URL:http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2392384
DOI:http://dx.doi.org/10.2139/ssrn.2392384
Parent Title (English):SAFE working paper series ; No. 40 [vers. June 3, 2015]
Series (Serial Number):SAFE working paper series (40 [Ver. juni 2015])
Publisher:SAFE
Place of publication:Frankfurt am Main
Document Type:Working Paper
Language:English
Year of Completion:2015
Year of first Publication:2015
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2016/02/02
Tag:Health shocks; Labor income risk; Mortality risk; Portfolio choice; Term life insurance
Pagenumber:55
HeBIS PPN:372417744
Institutes:Wirtschaftswissenschaften
House of Finance (HoF)
Center for Financial Studies (CFS)
Sustainable Architecture for Finance in Europe (SAFE)
Dewey Decimal Classification:330 Wirtschaft
JEL-Classification:D14 Personal Finance
D91 Intertemporal Consumer Choice; Life Cycle Models and Saving
G11 Portfolio Choice; Investment Decisions
G22 Insurance; Insurance Companies
Sammlungen:Universitätspublikationen
Licence (German):License Logo Veröffentlichungsvertrag für Publikationen

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