Life insurance demand under health shock risk
AbstractThis paper studies the life cycle consumption-investment-insurance problem of a family. The wage earner faces the risk of a health shock that significantly increases his probability of dying. The family can buy term life insurance with realistic features. In particular, the available contracts are long term so that decisions are sticky and can only be revised at significant costs. Furthermore, a revision is only possible as long as the insured person is healthy. A second important and realistic feature of our model is that the labor income of the wage earner is unspanned. We document that the combination of unspanned labor income and the stickiness of insurance decisions reduces the insurance demand significantly. This is because an income shock induces the need to reduce the insurance coverage, since premia become less affordable. Since such a reduction is costly and families anticipate these potential costs, they buy less protection at all ages. In particular, young families stay away from life insurance markets altogether. --
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt in its series SAFE Working Paper Series with number 40.
Date of creation: 2014
Date of revision:
Contact details of provider:
Postal: Grüneburgplatz 1, D-60323 Frankfurt am Main
Phone: +49 (0)69 798-30080
Fax: +49 (0)69 798-30077
Web page: http://safe-frankfurt.de/
More information through EDIRC
Health shocks; Portfolio choice; Term life insurance; Mortality risk; Labor income risk;
Find related papers by JEL classification:
- D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
- D91 - Microeconomics - - Intertemporal Choice - - - Intertemporal Household Choice; Life Cycle Models and Saving
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2014-03-22 (All new papers)
- NEP-DGE-2014-03-22 (Dynamic General Equilibrium)
- NEP-HEA-2014-03-22 (Health Economics)
- NEP-IAS-2014-03-22 (Insurance Economics)
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.:
- Merton, Robert C., 1971.
"Optimum consumption and portfolio rules in a continuous-time model,"
Journal of Economic Theory, Elsevier,
Elsevier, vol. 3(4), pages 373-413, December.
- R. C. Merton, 1970. "Optimum Consumption and Portfolio Rules in a Continuous-time Model," Working papers 58, Massachusetts Institute of Technology (MIT), Department of Economics.
- Bruhn, Kenneth & Steffensen, Mogens, 2011. "Household consumption, investment and life insurance," Insurance: Mathematics and Economics, Elsevier, vol. 48(3), pages 315-325, May.
- Campbell, Ritchie A, 1980. " The Demand for Life Insurance: An Application of the Economics of Uncertainty," Journal of Finance, American Finance Association, American Finance Association, vol. 35(5), pages 1155-72, December.
- David Love, 2008.
"The Effect of Marital Status and Children on Savings and Portfolio Choice,"
Department of Economics Working Papers
2008-13, Department of Economics, Williams College.
- David A. Love, 2010. "The Effects of Marital Status and Children on Savings and Portfolio Choice," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 23(1), pages 385-432, January.
- Ralph Koijen & Stijn Van Nieuwerburgh & Motohiro Yogo, 2011.
"Health and Mortality Delta: Assessing the Welfare Cost of Household Insurance Choice,"
NBER Working Papers
17325, National Bureau of Economic Research, Inc.
- Stijn Van Nieuwerburgh & Motohiro Yogo & Ralph S. J. Koijen, 2011. "Health and Mortality Delta: Assessing the Welfare Cost of Household Insurance Choice," 2011 Meeting Papers 633, Society for Economic Dynamics.
- Yogo, Motohiro & Koijen, Ralph S.J. & Van Nieuwerburgh, Stijn, 2014. "Health and Mortality Delta: Assessing the Welfare Cost of Household Insurance Choice," Staff Report, Federal Reserve Bank of Minneapolis 499, Federal Reserve Bank of Minneapolis.
- Stijn Van Nieuwerburgh & Motohiro Yogo & Ralph S.J. Koijen, 2009. "Optimal Health and Longevity Insurance," 2009 Meeting Papers, Society for Economic Dynamics 185, Society for Economic Dynamics.
- Jay H. Hong & JosÃƒÂ©-VÃƒÂctor RÃƒÂos-Rull, 2012.
"Life Insurance and Household Consumption,"
American Economic Review, American Economic Association,
American Economic Association, vol. 102(7), pages 3701-30, December.
- Huang, Huaxiong & Milevsky, Moshe A. & Salisbury, Thomas S., 2012. "Optimal retirement consumption with a stochastic force of mortality," Insurance: Mathematics and Economics, Elsevier, vol. 51(2), pages 282-291.
- Munk, Claus & SÃ¸rensen, Carsten, 2010. "Dynamic asset allocation with stochastic income and interest rates," Journal of Financial Economics, Elsevier, Elsevier, vol. 96(3), pages 433-462, June.
- Merton, Robert C, 1969. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 247-57, August.
- Pliska, Stanley R. & Ye, Jinchun, 2007. "Optimal life insurance purchase and consumption/investment under uncertain lifetime," Journal of Banking & Finance, Elsevier, Elsevier, vol. 31(5), pages 1307-1319, May.
- Richard, Scott F., 1975. "Optimal consumption, portfolio and life insurance rules for an uncertain lived individual in a continuous time model," Journal of Financial Economics, Elsevier, Elsevier, vol. 2(2), pages 187-203, June.
- Huaxiong Huang & Moshe A. Milevsky & Jin Wang, 2008. "Portfolio Choice and Life Insurance: The CRRA Case," Journal of Risk & Insurance, The American Risk and Insurance Association, The American Risk and Insurance Association, vol. 75(4), pages 847-872.
- Joao F. Cocco, 2005. "Consumption and Portfolio Choice over the Life Cycle," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 18(2), pages 491-533.
- Cocco, JoÃ£o F. & Gomes, Francisco J., 2012. "Longevity risk, retirement savings, and financial innovation," Journal of Financial Economics, Elsevier, Elsevier, vol. 103(3), pages 507-529.
- Huaxiong Huang & Moshe A. Milevsky & Thomas S. Salisbury, 2012. "Optimal retirement consumption with a stochastic force of mortality," Papers 1205.2295, arXiv.org.
- Merton, Robert C., 1975. "Theory of Finance from the Perspective of Continuous Time," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 10(04), pages 659-674, November.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (ZBW - German National Library of Economics).
If references are entirely missing, you can add them using this form.