Does Cognitive Ability Impact Life Insurance Policy Lapsation?

48 Pages Posted: 21 Oct 2014

See all articles by Barry S. Mulholland

Barry S. Mulholland

University of Akron - Department of Finance

Michael S. Finke

The American College

Date Written: September 12, 2014

Abstract

Life insurance is an important household risk management and financial tool. Policy lapsation has economic effects on life insurance companies, policyholders, and beneficiaries and the impact may be detrimental when these lapses are unexpected. Prior literature has examined several hypotheses of life insurance lapse focusing mainly on macroeconomic factors using aggregate data and household microeconomic factors using household-level data. We introduce and test individual cognitive ability variables in a model of the life insurance voluntary lapse decision by individual policyholders using household-level data from the Health and Retirement Study. We find that one measure of cognitive ability in particular, numeracy, is related to the voluntary lapse decision. While controlling for numeracy, we find evidence that those individuals with higher levels of net worth are less likely to voluntarily lapse a policy which is consistent with the emergency fund hypothesis. We introduce a new measure of liquidity shock, kids moving home, into the model and find it has a strong positive relationship with the decision to voluntarily lapse a policy. Consistent with life insurance demand theory, we find that those who have recently entered retirement are more likely to lapse their policy.

Keywords: Health and Retirement Study; life insurance; cognitive ability; lapsation

JEL Classification: G22, D14, D12

Suggested Citation

Mulholland, Barry S. and Finke, Michael S., Does Cognitive Ability Impact Life Insurance Policy Lapsation? (September 12, 2014). Available at SSRN: https://ssrn.com/abstract=2512076 or http://dx.doi.org/10.2139/ssrn.2512076

Barry S. Mulholland (Contact Author)

University of Akron - Department of Finance ( email )

259 S. Broadway St.
Akron, OH 44325-4803
United States
330-972-4524 (Phone)
330-972-5970 (Fax)

HOME PAGE: http://www.uakron.edu/cba/departments/finance/financial-planning.dot

Michael S. Finke

The American College ( email )

Bryn Mawr, PA 19010
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
160
Abstract Views
1,298
rank
249,948
PlumX Metrics