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Are the Elderly Really Over-Annuitized? New Evidence on Life Insurance and Bequests

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  • Jeffrey R. Brown

Abstract

This paper provides evidence against the hypothesis that elderly individuals with strong bequest motives purchase term life insurance to offset mandatory annuitization by the existing Social Security system. Using new data on elderly households, this study is able to examine ownership of pure term life insurance separately from whole life, or cash-value, policies. This is an important distinction in the Annuity Offset Model' because the central implication is that term insurance is purchased in order to undo' excessive government annuitization in the form of Social Security, while whole life policies among the elderly primarily consist of tax deferred savings. Evidence is presented that many households simultaneously choose to hold privately purchased annuities and term life insurance, a choice that is inconsistent with the notion that these individuals are over-annuitized. Results also indicate that the hypothesized positive relationship between term insurance ownership and Social Security benefits does not hold once one analyzes term separately from cash value policies. Previous empirical results appear to have been overly favorable to the Annuity Offset Model due to the inability to adequately account for the strong correlation between whole life insurance ownership and Social Security benefits, a correlation that can be attributed to tax-deferred savings and attempts to protect human capital during one's younger working life. Because these findings suggest that households are not seeking to undo' Social Security for bequest reasons, these results have implications for the current debate over annuitization options in an individual accounts retirement system.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7193.

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Date of creation: Jun 1999
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Publication status: published as Are the Elderly Really Over-Annuitized? New Evidence on Life Insurance and Bequests , Jeffrey Brown. in Themes in the Economics of Aging , Wise. 2001
Handle: RePEc:nbr:nberwo:7193

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  1. Michael D. Hurd & James P. Smith, 1999. "Anticipated and Actual Bequests," NBER Working Papers 7380, National Bureau of Economic Research, Inc.
  2. Laurence J. Kotlikoff & Lawrence H. Summers, 1980. "The Role of Intergenerational Transfers in Aggregate Capital Accumulation," NBER Working Papers 0445, National Bureau of Economic Research, Inc.
  3. Benjamin M. Friedman & Mark Warshawsky, 1988. "Annuity Prices and Saving Behavior in the United States," NBER Chapters, in: Pensions in the U.S. Economy, pages 53-84 National Bureau of Economic Research, Inc.
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  16. John Laitner & F. Thomas Juster, 1993. "New evidence on altruism: a study of TIAA-CREF retirees," Discussion Paper / Institute for Empirical Macroeconomics 86, Federal Reserve Bank of Minneapolis.
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  20. Lewis, Frank D, 1989. "Dependents and the Demand for Life Insurance," American Economic Review, American Economic Association, vol. 79(3), pages 452-67, June.
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