The Adequacy of Life Insurance

Abstract

Life insurance is easy to purchase. It’s relatively cheap. And it’s vital to most survivors. Hence, economic theory delivers one and only one prescription about life insurance – “buy it, if you need it.” But knowing whether you need life insurance is not so easy. And knowing that you need to buy life insurance and actually doing so are two different things. The truth is that no one likes to think about dying. No one likes to talk about dying. No one likes to pay premiums for an event, in this case dying early, that may never occur. And no one likes to spend time with life insurance agents. Economic man thus meets psychological man head on when it comes to life insurance decisions. The chance to pit economics against psychology is just one reason economists have been studying the determinants and adequacy of life insurance holdings for close to two decades. The other is the significant policy implications of potentially finding that insurance holdings are inadequate for a major segment of the population. Unlike much economic research that delivers at least two answers to any given question, the research on insurance adequacy produces a single clear and consistent message.