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Why Do Life Insurance Policyholders Lapse? The Roles of Income, Health and Bequest Motive Shocks


  • Edward Kung

    (Duke University)

  • Hanming Fang

    (University of Pennsylvania)


We present an empirical dynamic discrete choice model of life insurance decisions designed to bypass data limitations where researchers only observe whether an individual has made a new life insurance decision but but do not observe the actual policy choice or the choice set from which the policy is selected. The model also incorporates serially correlated unobservable state variables, for which we provide ample evidence that they are required to explain some key features in the data. We empirically implement the model using the limited life insurance holding information from the Health and Retirement Study (HRS) data. We deal with serially correlated unobserved state variables using posterior distributions of the unobservables simulated from Sequential Monte Carlo (SMC) methods. 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 less important, 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.

Suggested Citation

  • 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.
  • Handle: RePEc:red:sed011:188

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    References listed on IDEAS

    1. Jeremy T. Fox, 2007. "Semiparametric estimation of multinomial discrete-choice models using a subset of choices," RAND Journal of Economics, RAND Corporation, vol. 38(4), pages 1002-1019, December.
    2. Hu, Yingyao & Shum, Matthew, 2012. "Nonparametric identification of dynamic models with unobserved state variables," Journal of Econometrics, Elsevier, vol. 171(1), pages 32-44.
    3. Keane, Michael P & Wolpin, Kenneth I, 1994. "The Solution and Estimation of Discrete Choice Dynamic Programming Models by Simulation and Interpolation: Monte Carlo Evidence," The Review of Economics and Statistics, MIT Press, vol. 76(4), pages 648-672, November.
    4. He, Daifeng, 2009. "The life insurance market: Asymmetric information revisited," Journal of Public Economics, Elsevier, vol. 93(9-10), pages 1090-1097, October.
    5. Jason R. Blevins, 2016. "Sequential Monte Carlo Methods for Estimating Dynamic Microeconomic Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 31(5), pages 773-804, August.
    6. Tomas Philipson & John Cawley, 1999. "An Empirical Examination of Information Barriers to Trade in Insurance," American Economic Review, American Economic Association, vol. 89(4), pages 827-846, September.
    7. Glenn Daily & Igal Hendel & Alessandro Lizzeri, 2008. "Does the Secondary Life Insurance Market Threaten Dynamic Insurance?," American Economic Review, American Economic Association, vol. 98(2), pages 151-156, May.
    8. Hiroyuki Kasahara & Katsumi Shimotsu, 2009. "Nonparametric Identification of Finite Mixture Models of Dynamic Discrete Choices," Econometrica, Econometric Society, vol. 77(1), pages 135-175, January.
    9. Andriy Norets, 2009. "Inference in Dynamic Discrete Choice Models With Serially orrelated Unobserved State Variables," Econometrica, Econometric Society, vol. 77(5), pages 1665-1682, September.
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    Cited by:

    1. Ralph S.J. Koijen & Stijn Nieuwerburgh & Motohiro Yogo, 2016. "Health and Mortality Delta: Assessing the Welfare Cost of Household Insurance Choice," Journal of Finance, American Finance Association, vol. 71(2), pages 957-1010, April.
    2. S. Viswanathan & Adriano Rampini, 2013. "Household risk management," 2013 Meeting Papers 647, Society for Economic Dynamics.
    3. Michael Ziegelmeyer & Julius Nick, 2013. "Backing out of private pension provision: lessons from Germany," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 40(3), pages 505-539, August.
    4. repec:mea:meawpa:12262 is not listed on IDEAS
    5. Juan Pablo Atal & Hanming Fang & Martin Karlsson & Nicolas R. Ziebarth, 2017. "Exit, Voice or Loyalty? An Investigation into Mandated Portability of Front-Loaded Private Health Plans," NBER Working Papers 23468, National Bureau of Economic Research, Inc.
    6. Mitsukuni Nishida & Nathan Yang, 2014. "Better Together? Retail Chain Performance Dynamics in Store Expansion Before and After Mergers," Working Papers 14-08, NET Institute.
    7. repec:eee:jbfina:v:79:y:2017:i:c:p:12-27 is not listed on IDEAS

    More about this item

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms


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