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Prudence, risk aversion, and the demand for life insurance


  • Joseph Eisenhauer
  • Martin Halek


We estimate the effect of household wealth on the demand for life insurance using survey data from a broad cross-section of the USA. This procedure allows us to test the Pratt-Arrow hypothesis of decreasing absolute risk aversion (DARA). Additionally, we estimate the relative magnitude of prudence, the propensity to take precautions when faced with risk. We find that life insurance purchases increase with wealth, and that on average American households exhibit about 94 per cent as much prudence as risk aversion. On the basis of this evidence, we reject the DARA hypothesis.

Suggested Citation

  • Joseph Eisenhauer & Martin Halek, 1999. "Prudence, risk aversion, and the demand for life insurance," Applied Economics Letters, Taylor & Francis Journals, vol. 6(4), pages 239-242.
  • Handle: RePEc:taf:apeclt:v:6:y:1999:i:4:p:239-242 DOI: 10.1080/135048599353429

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    References listed on IDEAS

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    6. Kaldor, Nicholas, 1970. "The Case for Regional Policies," Scottish Journal of Political Economy, Scottish Economic Society, vol. 17(3), pages 337-348, November.
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    Cited by:

    1. repec:ebl:ecbull:v:4:y:2003:i:38:p:1-10 is not listed on IDEAS
    2. Edwin Wong, 2015. "Marital bargaining in the demand for life insurance: evidence from the Health and Retirement Study," Review of Economics of the Household, Springer, vol. 13(2), pages 243-268, June.
    3. David A. Love, 2010. "The Effects of Marital Status and Children on Savings and Portfolio Choice," Review of Financial Studies, Society for Financial Studies, vol. 23(1), pages 385-432, January.
    4. Martin Eling & Shailee Pradhan & Joan T Schmit, 2014. "The Determinants of Microinsurance Demand," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 39(2), pages 224-263, April.
    5. Arthur Hau, 2008. "When Is a Coinsurance-Type Insurance Policy Inferior or Even Giffen?," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 75(2), pages 343-364.
    6. Menhart, Michael & Rennhak, Carsten, 2006. "Drivers of the lifecycle: the example of the German insurance industry," Reutlingen Working Papers on Marketing & Management 2006-03, Reutlingen University, ESB Business School.
    7. J. Francois Outreville, 2014. "Risk Aversion, Risk Behavior, and Demand for Insurance: A Survey," Journal of Insurance Issues, Western Risk and Insurance Association, vol. 37(2), pages 158-186.

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