Risk Tolerance, Commitment Risk Across Policy Type, and the Demand for Life Insurance

James M. Carson, Cassandra R. Cole and Stephen G. Fier

The Financial Review, 2025, vol. 60, issue 4, 1437-1455

Abstract: Life insurers face one‐sided commitment risk that is partially mitigated by the introduction of various contract features, including front‐loading and the option to backdate, that are intended, in part, to “lock in” the policyholder. While prior literature has discussed one‐sided commitment and life insurance, research has not, to our knowledge, examined the intersection of risk tolerance, heterogeneity in commitment across policy type, and life insurance ownership. In this study, we employ a multi‐step decision model to examine this intersection. Controlling for various financial and demographic characteristics among households that own life insurance, we provide the first evidence that as risk tolerance increases, the likelihood of owning only cash value life insurance decreases, consistent with these consumers having a greater willingness to bear the higher reclassification risks associated with term life insurance.

Date: 2025
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