The demand for life insurance in a heterogeneous-agent life cycle economy with joint decisions

Abstract

A life cycle model is developed to explain how and why life insurance demand of household participants varies and to further explore risk sharing effects within a household. The model includes endogenous labor supply and joint decisions of life insurance demand for men and women, and generates consumption with a sudden drop around retirement and hump-shaped wealth and life insurance. The results show that life insurance demand peaks earlier in single-parent households than married-couple households and that life insurance demand has an ambiguous relationship with mortality and wealth. The results suggest that gender disparity in life insurance demand is due to income gap. The results indicate that the effect of a spouse’s earnings on the other spouse’s demand for life insurance depends on the correlation of income between the spouses under mortality risk, and labor income risk diversification plays a role in this effect.