A three essay examination of life insurance
Mulholland, Barry S.
MetadataShow full item record
Life insurance is an important risk management and financial tool, both for insurance companies and individual households. This dissertation is a combined study of various factors that may be influencing the life insurance sales process and the factors used by households in their decisions to purchase and maintain ownership of life insurance policies. The first study is an attempt to understand factors that affect the demand for life insurance. Life insurance demand has been experiencing a 50-year decline in the U.S. while there has also been a shift away from permanent life insurance products to term life insurance products. We identify exogenous factors influencing the demand for cash value life insurance and examine their importance in explaining the sharp decline in demand for permanent insurance. We find that demographic and tax code changes do not explain the magnitude of decline. Using data from the 1992 through 2010 Surveys of Consumer Finances, we find a consistent downward trend in life insurance ownership, especially among younger and middle-age households. We find the demand for cash value life insurance is centered on households that are wealthier and more financially sophisticated suggesting these products are being used more for their tax-sheltering properties than as a hedge against the loss of human capital. The second study in this dissertation examines advisor beliefs about life insurance illustration effectiveness and advisor attributes that may influence those beliefs. The life insurance illustration is the primary disclosure document used in the sale of life insurance. When an insurance company designates a life insurance policy form to be marketed with a life insurance illustration during the presentation and sale of a life insurance policy, state regulation dictates the content and structure of the illustration. Using data collected in 2012 through an online survey targeting financial advisors providing life insurance advice, we find that over one-third of survey respondents believe the mandated life insurance illustration is a less than effective consumer education and protection tool. We find the contractual relationships between advisors and insurers and between advisors and consumers significantly impact advisor opinions about life insurance illustrations. We find advisors display overconfidence in their knowledge and understanding of life insurance illustrations and this overconfidence appears to impact their opinions about illustrations. We find no significant evidence that the method by which advisors are compensated impacts their opinions about life insurance illustrations. In the third study, we examine life insurance policy lapsation to understand the impact of various factors on the decision to voluntarily lapse a policy. We introduce and test individual cognitive ability variables in a model of the life insurance voluntary lapse decision by individual policyholders using data from the 2008 and 2010 waves of the Health and Retirement Study. We find that one measure of cognitive ability, numeracy, is related to the voluntary lapse decision. While controlling for numeracy, we find evidence supporting the emergency fund hypothesis, finding that those individuals with higher levels of net worth are less likely to voluntarily lapse a policy. We introduce a new measure of shock, kids moving home, and find it has a strong positive relation with the decision to voluntarily lapse a policy. Consistent with life insurance demand theory, we find that those who have recently entered retirement are reducing their life insurance holding.