Household Life Cycle Protection: Life Insurance Holdings, Financial Vulnerability and Portfolio Implications

Abstract

Using the Survey of Consumer Finances we examine the life cycle demand for different types of life insurance. Specifically we test for the consumer's aversion to income volatility resulting from the death of a household's wage-earner through the purchase of life insurance. We first develop a financial vulnerability index to control for the risk to the household. We then examine the life cycle demand for life insurance using several definitions of life insurance. We find, in contrast to previous research, that there is a relationship between financial vulnerability and the amount of term life or total life insurance purchased. In addition, we find older consumers use less life insurance to protect a certain level of financial vulnerability than younger consumers. Secondly, our study provides evidence that life insurance demand is jointly determined as part of a household's portfolio. Finally, we consider the impact of family members' non-monetary contribution on the household's life cycle protection decision. Our results provide some evidence households take into account the value of non-monetary contribution in their insurance purchase.

Keywords: Household Life Insurance Holdings, Financial Vulnerability, Life Cycle Protection

JEL Classification: G22, H31, R22