Here are three unexpected things people do about life and annuities...
1. They buy TOO MUCH life insurance. You, as an agent, might say, "Impossible!" But, from an economist's perspective, many married people look as if they could maintain their current standard of living just fine if their spouse died.
2. They buy TOO FEW annuities. In theory, households should invest heavily in annuities, to protect themselves against uncertainty about longevity. In the real world, U.S. households over age 65 have only about 1% of their wealth in private-market annuities. Beshears and colleagues say economists have created "a large literature" to try to resolve the annuity sales gap puzzle.
3. They keep their life-annuity allocations about the same as they 'deplete their human capital.' The classical economic model predicts that households will shift toward annuities, and away from life insurance, as the members near the end of life. "Empirical evidence indicates that households rarely adjust these financial exposures," Beshears and his colleagues write. They suggest that might be because of inertia, or because of institutional forces.

Many economists think the way U.S. households use life insurance and annuities looks a little strange.

Most U.S. economists working today start with the “classical economic model.” That model implies that households should buy enough insurance now to maximize what they can consume later.

In the real world, U.S. households buy more of some insurance products than the classical model suggests, and they spend less on other products.

John Beshears, who teaches business administration at Harvard’s business school, and three colleagues look at some of those life and annuity puzzles in a new discussion of behavioral household finance. The discussion is part of an upcoming book on economics, the “First Handbook of Behavioral Economics, Volume 1.”

Beshears and his colleagues have published the discussion as a working paper, or formal draft, on the website of the National Bureau of Economic Research, behind a paywall.

A link to the discussion is available here.

For a look at three of the life and annuity puzzles described in the working paper, see the idea cards in the idea card gallery above.

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