Behavioral aspects of household portfolio choice: Effects of loss aversion on life insurance uptake and savings

In Do Hwang

International Review of Economics & Finance, 2024, vol. 89, issue PA, 1029-1053

Abstract: This paper provides empirical evidence that loss aversion decreases insurance demand and increases savings demand using individual-level data on the US elderly. Specifically, loss-averse individuals have a significantly lower ownership rate of term life insurance which is pure insurance, and they have a higher ownership rate of whole life insurance, which has a savings element. This paper also shows that loss-averse individuals own a smaller amount of stock (equity) than others and a greater amount of non-risky financial assets, such as deposits and bonds. This aligns with the prospect theory's prediction that boundedly rational consumers may view pure protection insurance (term life insurance) as a “risky investment” like stocks because the insured may just lose the premiums if a bad event does not occur during the policy term. They instead opt for “safer options” such as whole life insurance, which guarantees payment of a death benefit, or deposits and bonds. Furthermore, this paper provides suggestive evidence that loss aversion has a negative impact on insurance demand beyond the US, by showing that there is a negative association between loss aversion and insurance penetration rates in 51 countries.

Keywords: Loss aversion; Behavioral insurance; Term life insurance; Whole life insurance; Savings puzzle (search for similar items in EconPapers)
JEL-codes: D14 D81 D91 G40 G52 (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Behavioral Aspects of Household Portfolio Choice: Effects of Loss Aversion on Life Insurance Uptake and Savings (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:89:y:2024:i:pa:p:1029-1053

DOI: 10.1016/j.iref.2023.07.027

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