The Adequacy of Life Insurance: Evidence from the Health and Retirement Survey

58 Pages Posted: 4 Jan 2000 Last revised: 14 Oct 2010

See all articles by B. Douglas Bernheim

B. Douglas Bernheim

Stanford University - Department of Economics; National Bureau of Economic Research (NBER)

Lorenzo Forni

International Monetary Fund (IMF)

Jagadeesh Gokhale

Cato Institute

Laurence J. Kotlikoff

Boston University - Department of Economics; National Bureau of Economic Research (NBER); Gaidar Institute for Economic Policy

Date Written: October 1999

Abstract

This study examines the adequacy of life insurance among married American couples approaching retirement. It improves upon previous work in two ways. First, it is based on recent, high quality data (the 1992 Health and Retirement Survey with matched Social Security earnings histories). Second, it employs new financial planning software to evaluate the life insurance needs of each household. This software embodies an elaborate life- cycle planning model that accounts for a broad array of demographic, economic, and financial characteristics. We find that a sizable minority of couples in the HRS sample are significantly underinsured. Almost one third of wives and more than 10 percent of husbands would have suffered living standard reductions of 20 percent or more had their spouses died in 1992. Underinsurance tends to be more common among low income households, couples with asymmetric earnings, younger households, couples with dependent children, and non-whites. In general, households with greater vulnerabilities do not appear to compensate adequately for these vulnerabilities through greater life insurance holdings. Among some groups, the frequency of underinsurance exceeds two-thirds, and the frequency of severe underinsurance (a reduction in living standard of 40 percent or greater) exceeds one-quarter.

Suggested Citation

Bernheim, B. Douglas and Forni, Lorenzo and Gokhale, Jagadeesh and Kotlikoff, Laurence J., The Adequacy of Life Insurance: Evidence from the Health and Retirement Survey (October 1999). NBER Working Paper No. w7372. Available at SSRN: https://ssrn.com/abstract=194613

B. Douglas Bernheim (Contact Author)

Stanford University - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Lorenzo Forni

International Monetary Fund (IMF) ( email )

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Jagadeesh Gokhale

Cato Institute ( email )

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Laurence J. Kotlikoff

Boston University - Department of Economics ( email )

270 Bay State Road
Boston, MA 02215
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617-353-4449 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Gaidar Institute for Economic Policy

Gazetny per. 5-3
Moscow, 125993
Russia

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