Why Do Life Insurance Policyholders Lapse? The Roles of Income, Health and Bequest Motive Shocks
AbstractPrevious research has shown that the reasons for lapsation have important implications regarding the effects of the emerging life settlement market on consumer welfare. We present and empirically implement a dynamic discrete choice model of life insurance decisions to assess the importance of various factors in explaining life insurance lapsations. In order to explain some key features in the data, our model incorporates serially correlated unobservable state variables which we deal with using posterior distributions of the unobservables simulated from Sequential Monte Carlo (SMC) method. We estimate the model using the life insurance holding information from the Health and Retirement Study (HRS) data. Counterfactual simulations using the estimates of our model suggest that a large fraction of life insurance lapsations are driven by i.i.d choice specific shocks, particularly when policyholders are relatively young. But as the remaining policyholders get older, the role of such i.i.d. shocks gets smaller, and more of their lapsations are driven either by income, health or bequest motive shocks. Income and health shocks are relatively more important than bequest motive shocks in explaining lapsations when policyholders are young, but as they age, the bequest motive shocks play a more important role. We also suggest the implications of these findings regarding the effects of the emerging life settlement market on consumer welfare.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17899.
Date of creation: Mar 2012
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Other versions of this item:
- Hanming Fang & Edward Kung, 2012. "Why Do Life Insurance Policyholders Lapse? The Roles of Income, Health and Bequest Motive Shocks," PIER Working Paper Archive 12-006, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
- Edward Kung & Hanming Fang, 2011. "Why Do Life Insurance Policyholders Lapse? The Roles of Income, Health and Bequest Motive Shocks," 2011 Meeting Papers 188, Society for Economic Dynamics.
- G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies
- H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
- L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
This paper has been announced in the following NEP Reports:
- NEP-AGE-2012-03-21 (Economics of Ageing)
- NEP-ALL-2012-03-21 (All new papers)
- NEP-DCM-2012-03-21 (Discrete Choice Models)
- NEP-HEA-2012-03-21 (Health Economics)
- NEP-IAS-2012-03-21 (Insurance Economics)
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Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- Why do people let life insurance policies lapse?
by Economic Logician in Economic Logic on 2012-03-27 15:55:00
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