Life insurance demand under health shock risk : [Version: 7 February 2014]

  • 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 term life insurance with realistic features. In particular, the available contracts are long term so that decisions are sticky and can only be revised at significant costs. Furthermore, a revision is only possible as long as the insured person is healthy. A second important and realistic 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 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 life insurance markets altogether.

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Metadaten
Author:Holger KraftGND, Lorenz S. Schendel, Mogens Steffensen
URN:urn:nbn:de:hebis:30:3-331503
URL:http://ssrn.com/abstract=2392384
DOI:https://doi.org/10.2139/ssrn.2392384
Parent Title (German):SAFE working paper series ; No. 40
Series (Serial Number):SAFE working paper series (40)
Publisher:SAFE
Place of publication:Frankfurt am Main
Document Type:Working Paper
Language:English
Year of Completion:2014
Year of first Publication:2014
Publishing Institution:Universit├Ątsbibliothek Johann Christian Senckenberg
Release Date:2014/03/04
Tag:Health shocks; Labor income risk; Mortality risk; Portfolio choice; Term life insurance
Issue:Version: 7 February 2014
Page Number:45
First Page:1
Last Page:39
HeBIS-PPN:348921225
Institutes:Wirtschaftswissenschaften / Wirtschaftswissenschaften
Wissenschaftliche Zentren und koordinierte Programme / Sustainable Architecture for Finance in Europe (SAFE)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Sammlungen:Universit├Ątspublikationen
Licence (German):License LogoDeutsches Urheberrecht