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Savings motives and the effectiveness of tax incentives – an analysis based on the demand for life insurance in Germany

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  • Mathias Sommer

    () (Munich Center for the Economics of Aging (MEA))

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    Abstract

    We exploit data on German households’ savings in life insurance products, the characteristics of life insurance products and the specific tax treatment of savings in life insurance products to assess the importance of different savings motives and the effectiveness of tax incentives. Our insights about the determinants of the demand for life insurance products also allow a broad assessment of the possible consequences from the recent reforms of the pension system and of the tax treatment of life insurance policies. Socioeconomic and institutional factors generate substantial variation within the population and over time, e.g. in the replacement rates of the public pension system and the household tax rates, which allows us to disentangle savings motives and the effects of tax incentives from other factors. We employ a number of indicators for the different savings motives. Further, based on the specifics of the German tax law and the richness of our data we are able to generate a unique measure of possible tax savings associated with savings in life insurance products. We find support for our hypothesis that savings in life insurance products may substitute for a low replacement rate in the public pension system. Only high income households who face lower replacement rates from the public pension system do not increase their demand for life insurance products. Further, we use several measures for a possible bequest or family insurance motive. Our evidence on the relevance of such savings motives is mixed like the existing literature. The presence of a family increases the demand for term life insurance but households with children do not accumulate higher levels of life insurance wealth. Further, some income inequality within a couple increases the likelihood to save in life insurance. The effects are not increasing in the degree of income inequality though and only partly significant. Finally, we find households with high tax rates to be more likely to invest in life insurance products, indicating that the tax free interest earnings from a long term insurance contract play a strong role in households’ choice to invest in life insurance. The possibility to deduct contributions from taxable income turns out to be no incentive to save in life insurance products.

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    Paper provided by Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy in its series MEA discussion paper series with number 07125.

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    Date of creation: 02 Aug 2007
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    Handle: RePEc:mea:meawpa:07125

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    Postal: Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy, Amalienstraße 33, 80799 München, Germany
    Phone: +49/89/38602.442
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    15. Jurges, Hendrik, 2001. " Do Germans Save to Leave an Estate? An Examination of the Bequest Motive," Scandinavian Journal of Economics, Wiley Blackwell, vol. 103(3), pages 391-414, September.
    16. Mathias Sommer, 2005. "Trends in German households’ portfolio behavior - assessing the importance of age- and cohort-effects," MEA discussion paper series 05082, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
    17. Feldstein, Martin S, 1976. "Social Security and Saving: The Extended Life Cycle Theory," American Economic Review, American Economic Association, vol. 66(2), pages 77-86, May.
    18. Schunk, Daniel, 2007. "What Determines the Saving Behavior of German Households? An Examination of Saving Motives and Saving Decisions," Sonderforschungsbereich 504 Publications 07-10, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim.
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    20. Feldstein, Martin S, 1976. "Personal Taxation and Portfolio Composition: An Econometric Analysis," Econometrica, Econometric Society, vol. 44(4), pages 631-50, July.
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