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Household Life Insurance Gap Puzzles Economists

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What You Need to Know

  • Researches looked at four years of data from a large financial services company to study patterns in purchasing risk protection.
  • The wealthier people in the sample made more use both of term life insurance and property insurance.
  • The gap persisted even after the economists adjusted for many variables that seemed as if they could explain the difference.

Wealthier Americans have more resources they can use to protect themselves against risk, but, even after controlling for many different factors, they seem to buy more insurance.

Michael Gropper and Camelia Kuhnen, economists with the University of North Carolina at Chapel Hill, reported on that apparent wealth-related coverage gap in a new working paper distributed by the National Bureau of Economic Research.

A working paper is a paper that has not yet been through a full peer review process.

Gropper and Kuhnen based their analysis on data on 63,000 customers from a large financial services company. The records included data collected from September 2015 through March 2019.

The economists found a similar coverage gap existed for ownership of term life insurance as well as for use of homeowners insurance and other forms of property and casualty insurance.

“Whether we measure wealth by the value of financial assets, or by the value of the homes individuals own, we find that life insurance coverage as well as property insurance coverage increases with wealth, controlling for the value of the insured asset,” the economists write in the paper. “We estimate that a $1 increase in financial wealth leads to an increase of 68 cents in a person’s term life insurance coverage limit, and to an increase of $2.25 in the coverage limit of their homeowners insurance policy.”

Factors such as financial literacy, legal risk and a need for quick access to cash appear to explain only part of the gap, the economists add.

The economists did not assess whether the people in their sample were under- or over insured, and they did not see how the people in the sample did during recessions.

They suggested one possibility is that wealthier households may have more access to insurance than other households.

“If there is a preferential supply of insurance products to the wealthy, who theoretically are those who need these products the least, this could imply that the less well-off households are underserved by insurance companies and will not be protected when negative shocks arrive in the future,” the economists conclude.

(Image: PopTika/Shutterstock)


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