Understanding the Shift in Demand for Cash Value Life Insurance

Abstract

Ownership of cash value life insurance in the United States has fallen in recent decades. Changes in age cohorts, family composition, and tax laws may have contributed to this decline. We identify factors that influence the demand for cash value life insurance and test whether they alone can explain the sharp decline in ownership. Demographic and tax code changes do not explain the decrease in permanent insurance. There is a consistent downward trend in demand from 1992 to 2010—particularly among middle‐age and younger households. The fewer households who own cash value policies are on average wealthier and more financially sophisticated, suggesting that permanent life insurance is increasingly being used as a tax shield rather than as a hedge against a loss in human capital.

Cognitive ability impact on life insurance lapsation

“…Life insurance is used as both a tax-sheltered form of savings (Brown & Poterba, 2006) and for non-human-capital-replacement issues like accumulating cash to pay estate taxes for those households vulnerable to estate taxes (Milevsky, 2006). Mulholland et al (2016) find that households vulnerable to U.S. estate taxes are more likely to own cash value life insurance. For these reasons, we control for estate tax vulnerability under the 2010 estate tax laws.…”

“…We control for these differences by including gender in our model. Mulholland et al (2016) find that the financial sophistication of the policyholder plays an important part in the decision to own life insurance. Therefore, our model includes a proxy for financial knowledge.…”

“…We separate income and net worth into quartiles. Following Mulholland et al (2016), we create a dummy variable to identify those households who may be vulnerable to estate taxes in 2010 because they have net worth, including a second home, of greater than $5 million, the then-current maximum estate tax exemption.…”

“…Life insurance acts as a hedge against the uncertainty of the labor income flows of household members (Campbell 1980;Fischer, 1973;Yaari, 1965), it helps beneficiaries meet their need for smoothing consumption over the life cycle (Lewis, 1989), and it helps policyholders meet their bequest motives with a potentially guaranteed source of funds (Bernheim, 1991). It can also be used as a tax-advantaged savings tool (Rankin, 1987) and as a tool to reduce estate tax erosion (Milevsky, 2006;Mulholland et al, 2016).…”

The Determinants of Life Insurance Ownership

“…Recent studies conducted in the United States show that age, married status, education of the head of family have a positive effect on life insurance ownership (Kim & Hanna, 2019). Based on the theory of life cycle, starting from getting married, having children, buying a house can determine the decision to have life insurance (Mulholland et al, 2016).…”