CSY_LI3a

CSY_LI3a - Husbands Might Really Be That Cheap * Matthew S....

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Unformatted text preview: Husbands Might Really Be That Cheap * Matthew S. Chambers † Department of Economics Towson University Don E. Schlagenhauf ‡ Department of Economics Florida State University Eric R. Young § Department of Economics Florida State University October 2003 JEL Classification: D12, D91, J17 Keywords: Life Insurance, Consumption-Savings Decisions, Incomplete Markets Preliminary and Incomplete: Please Do Not Quote * We would like to thank participants in seminars at Clemson, Florida State, Whar- ton, the 2003 Winter Econometric Society, the 2003 Midwest Macro Meetings, and the Minneapolis Fed as well as thanks to Andy Abel, Fernando Alvarez, Jesus Fern´ andez, Carlos Garriga, Ed Green, Stuart Low, Dave MacPherson, David Marshall, Chris Phelan, Ned Prescott, and especially Ed Prescott and V ´ ictor R ´ ios-Rull for helpful comments. We would also like to thank Charles Grassl, Curtis Knox, and Joe Travis for computational as- sistance and tips. Young would like to thank the Florida State University FYAP program for financial support. All remaining errors remain our errors. † Email: [email protected] ‡ Email: [email protected] § Corresponding author. Email: [email protected] 1 Abstract This paper explores life insurance holdings from a general equi- librium perspective. Drawing on the data explored in Chambers, Schlagenhauf, and Young (2003), we calibrate an overlapping genera- tions lifecycle economy with incomplete asset markets to match facts regarding the uncertainty of income and demographics. We then esti- mate that life insurance holdings for the purpose of smoothing family consumption are so large that they constitute a puzzle from the per- spective of standard economic theory. Furthermore, the welfare gains from a life insurance market are concentrated in the minds of house- holds who use the real world market very little. 2 Failure of the head of a family to insure his or her life against a sudden loss of economic value through death or disability amounts to gambling with the greatest of life’s values; and the gamble is a particularly mean one because, in the case of loss, the dependent family, and not the gambler must suffer the consequences. S. Huebner and K. Black, Jr., Life Insurance 1 Introduction Simply put, the life insurance market is big. In terms of policy face values, the total size of this market in 1998 was 0 . 95 times annual GDP. Alterna- tively, in terms of expenditures LIMRA data reports $212 billion in total premiums paid during 1998, and the BEA category ”Expenses of Handling Life Insurance and Pension Plans” constitutes 1 . 4 percent of total consump- tion. The general perception, perhaps as a result of the marketing strategy of life insurance firms, is that households are holding an insufficient amount of life insurance - the quote from the textbook by Huebner and Black insinuates this, as do commercials that assert how frequently a widow falls to poverty income levels as the result of the untimely death of her spouse.income levels as the result of the untimely death of her spouse....
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This note was uploaded on 12/14/2011 for the course FIN 5515 taught by Professor Staff during the Spring '10 term at FSU.

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CSY_LI3a - Husbands Might Really Be That Cheap * Matthew S....

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