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The mismatch between life insurance holdings and financial vulnerabilities: evidence from the Health and Retirement Survey

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Author Info
B. Douglas Bernheim
Lorenzo Forni
Jagadeesh Gokhale
Laurence J. Kotlikoff

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Abstract

Using data on older workers from the 1992 Health and Retirement Survey, along with an elaborate life-cycle planning model, the authors quantify the effect of each individual's death on the financial status of his or her survivors and the degree to which life insurance holdings moderate these consequences. The average change in living standard that would result from a spouse's death is small, both in absolute terms and relative to the decline that would occur without insurance. However, this average obscures a startling mismatch between insurance holdings and underlying vulnerabilities. For many of the most vulnerable, the amounts purchased are surprisingly small, and for many of the least vulnerable, the amounts are surprisingly large. As a result, uninsured vulnerabilities are quite widespread. The magnitude of these vulnerabilities, as well as the proclivity to address any given degree of vulnerability by purchasing life insurance, vary systematically with individual and household characteristics.

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Paper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 0109.

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Length: 1-35
Date of creation: 2001
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Handle: RePEc:fip:fedcwp:0109

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Keywords: Life insurance companies;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Auerbach, Alan J. & Kotlikoff, Laurence J., 1991. "The adequacy of life insurance purchases," Journal of Financial Intermediation, Elsevier, vol. 1(3), pages 215-241, June. [Downloadable!] (restricted)
  2. Olivia S. Mitchell et al., 1999. "New Evidence on the Money's Worth of Individual Annuities," American Economic Review, American Economic Association, vol. 89(5), pages 1299-1318, December. [Downloadable!] (restricted)
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  3. Olivia S. Mitchell & James F. Moore, . "Retirement Wealth Accumulation and Decumulation: New Developments and Outstanding Opportunities," Pension Research Council Working Papers 97-8, Wharton School Pension Research Council, University of Pennsylvania.
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  4. Alan J. Auerbach & Laurence J. Kotlikoff, 1987. "Life Insurance of the Elderly: Adequacy and Determinants," NBER Working Papers 1737, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Alan J. Auerbach & Laurence Kotlikoff, 1991. "Life Insurance Inadequacy - Evidence From a Sample of Older Widows," NBER Working Papers 3765, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Kotlikoff, Laurence J & Spivak, Avia, 1981. "The Family as an Incomplete Annuities Market," Journal of Political Economy, University of Chicago Press, vol. 89(2), pages 372-91, April. [Downloadable!] (restricted)
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  7. B. Douglas Bernheim & Lorenzo Forni & Jagadeesh Gokhale & Laurence J. Kotlikoff, 1999. "The Adequacy of Life Insurance: Evidence from the Health and Retirement Survey," NBER Working Papers 7372, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. Bernheim, B. Douglas, 1987. "The economic effects of social security : Toward a reconciliation of theory and measurement," Journal of Public Economics, Elsevier, vol. 33(3), pages 273-304, August. [Downloadable!] (restricted)
  9. James F. Moore & Olivia S. Mitchell, 1997. "Projected Retirement Wealth and Savings Adequacy in the Health and Retirement Study," NBER Working Papers 6240, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  10. Michael D. Hurd & David A. Wise, 1989. "The Wealth and Poverty of Widows: Assets Before and After the Husband's Death," NBER Working Papers 2325, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Ringen, Stein, 1991. "Households, Standard of Living, and Inequality," Review of Income and Wealth, Blackwell Publishing, vol. 37(1), pages 1-13, March.
  12. Nelson, Julie A, 1992. "Methods of Estimating Household Equivalence Scales: An Empirical Investigation," Review of Income and Wealth, Blackwell Publishing, vol. 38(3), pages 295-310, September.
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. David M. Cutler & Amy Finkelstein & Kathleen McGarry, 2008. "Preference Heterogeneity and Insurance Markets: Explaining a Puzzle of Insurance," NBER Working Papers 13746, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Wojciech Kopczuk & Joel Slemrod, 2005. "Denial of Death and Economic Behavior," Advances in Theoretical Economics, Berkeley Electronic Press, vol. 5(1), pages 1207-1207. [Downloadable!] (restricted)
    Other versions:
  3. B. Douglas Bernheim & Solange Berstein, 2002. "Saving and Life Insurance Holdings at Boston University – A Unique Case Study," Working Papers Central Bank of Chile 161, Central Bank of Chile. [Downloadable!]
  4. Thomas Davidoff & Jeffrey R. Brown & Peter A. Diamond, 2005. "Annuities and Individual Welfare," American Economic Review, American Economic Association, vol. 95(5), pages 1573-1590, December. [Downloadable!]
    Other versions:
  5. B. Douglas Bernheim & Katherine Grace Carman & Jagadeesh Gokhale & Laurence J. Kotlikoff, 2001. "The Mismatch Between Life Insurance Holdings and Financial Vulnerabilities: Evidence from the Survey of Consumer Finances," NBER Working Papers 8544, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  6. James, Estelle & Edwards, Alejandra Cox & Wong, Rebecca, 2003. "The gender impact of pension reform : a cross-country analysis," Policy Research Working Paper Series 3074, The World Bank. [Downloadable!]
  7. Jay H. Hong & Jose-Victor Rios-Rull, 2004. "Life insurance and household consumption," Working Papers 04-10, Federal Reserve Bank of Philadelphia. [Downloadable!]
  8. Katherine Grace Carman & Jagadeesh Gokhale & Laurence J. Kotlikoff, 2003. "The Impact on Consumption and Saving of Current and Future Fiscal Policies," NBER Working Papers 10085, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Dardanoni, V & Li Donni, P, 2008. "Testing For Asymmetric Information In Insurance Markets With Unobservable Types," Health, Econometrics and Data Group (HEDG) Working Papers 08/26, HEDG, c/o Department of Economics, University of York. [Downloadable!]
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