Wealth and Insurance Choices: Evidence from U.S. Households

Abstract

Theoretically, wealthier people should buy less insurance, and should self-insure through saving instead, as insurance entails monitoring costs. We use administrative data for 63,000 individuals across 2.5 million person-month observations and, contrary to theory, find that wealthier individuals have better life and property insurance coverage, controlling for the value of assets insured. This puzzle holds in cross-sectional and person fixed-effects estimations. This positive wealth-insurance correlation is not explained by wealth-related differences in background or legal risk, preferences, liquidity constraints, education, employment, or pricing. These findings call for further examination of the demand and supply of this aspect of households’ portfolios.

Keywords: household finance, insurance choices, financial disparities

JEL Classification: G52, G51, D14