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Life Insurance Demand under Health Shock Risk

Source:
forthcoming in Journal of Risk and Insurance
Year:
2016
Authors:
Christoph Hambel,
Holger Kraft,
Lorenz Schendel,
Mogens Steffensen
Reseach Area:
Household Finance
Abstract:

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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