Overcoming Barriers to Life Insurance Coverage: A Behavioral Approach

Abstract

While life insurance purchase decisions have long been studied, we still do not know how people decide if they need insurance or how much they need. Using in‐depth interviews, we peer into the black box of employee decision making to learn what people know about this employee benefit, and how they decide if it is of value for them. We find that individuals understand the need for life insurance, but find many behavioral economic barriers to getting adequate coverage, including mental accounting, money illusion, and a strong role of defaults. We then conduct an online experiment of the hypothetical employee‐benefit purchase scenario, and find a few, simple interventions could help individuals better decide their life insurance needs.

Life insurance purchase behaviour: A systematic review and directions for future research

“…In the context of life insurance, studies in literature analysed the bounded rational behaviour of individuals and identified different behavioural biases that influence their decision to insure. Coe et al (2016) performed an experimental study on the employees of a company to understand their behaviour to purchase employee benefit plans by controlling the factors such as income, age, education, marital status and the number of children. The study found that employees were aware of life insurance's significance but were unable to decide an adequate amount of life insurance they should purchase.…”

“…The theory assumes that consumers purchase LIPs to maximize the beneficiary's utility (e.g., Alhassan & Biekpe, 2016;Ampaw et al, 2018); Andersson & Eriksson, 2015;Arun et al, 2012;Beck & Webb, 2003;Celik & Kayali, 2009;Chen et al, 2001). However, an inadequate amount of research is present in the literature on investigating consumers' bounded rational behaviour in a life insurance context based on the behavioural economics theory (Bauchet & Morduch, 2019;Coe et al, 2016). According to this theory, consumers often use some heuristics to estimate their probability of losses and estimate the gain and losses differently.…”

“…These factors include both demand-side factors such as demographic factors, economic, psychographic, individual's financial status, etc., and supply-side factors, namely price of the policy, premium loading factors, company image, amongst others (Beck & Webb, 2003). Few studies have also examined that behavioural biases such as loss aversion, framing effect, overconfidence bias significantly affect the life insurance purchase decisions (Coe et al, 2016).…”

“…Coe et al (2016) experimented with a company's employees to identify the behavioural biases affecting their decision to purchase group life insurance. In the future, experiments can be performed to empirically test the effect of different behavioural biases (derived in literature byThaler (1980)) on consumers' purchasing non-group LIP.A large number of theories used in life insurance literature are reflected in Table2.…”

Default Options and Insurance Demand

“…This may increase the tendency of individuals to follow heuristics and their proneness to behavioural biases which can influence default effects (Thaler and Sunstein, 2008). Therefore, there may be different decision processes that operate when defaults are applied within the LPHI risk context, compared to non-catastrophic risks which have been the focus of multiple studies on default effects (e.g., Johnson et al, 1993;Johnson et al, 2013;Coe et al, 2016;Krieger and Felder, 2013). This also highlights the innovation of a dedicated study of defaults under LPHI risk.…”