Life Insurance Demand under Health Shock Risk

Journal of Risk and Insurance, Vol. 84, Issue 4, pp. 1171–1202

Christoph Hambel,
Holger Kraft,
Lorenz Schendel,
Mogens Steffensen
Research Area:
Household Finance
Dec 2017
Health shocks, Portfolio choice, Term life insurance, Mortality risk, Labor income risk

This article studies the consumption-investment-insurance problem of a family. The wage earner faces the risk of a health shock. The family can buy long-term life insurance that can only be revised at significant costs. A revision is only possible as long as the insured person is healthy. The combination of unspanned labor income and the stickiness of insurance decisions reduces the long-term insurance demand significantly. Since such a reduction is costly and families anticipate these potential costs, they buy less protection at all ages. In particular, young families stay away from long-term life insurance markets altogether.

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