The Life Insurance Wealth Gap
Episode 142 – America’s wealth gap has gotten a lot of attention lately, but did you know that it is even more pronounced when you factor in life insurance?
Transcript of Podcast Episode 142
A lot has been written in recent years about America’s so-called “wealth gap” and what can be done to narrow it. But new research indicates that when it comes to life insurance, the gap is even more significant.
In a July 2021 paper for the National Bureau of Economic Research, two economists from the University of North Carolina took a deep dive into the economics of life insurance and reached a startling conclusion: wealthier people, even after adjusting for many variables, made more use of life insurance than the less wealthy. 1
The duo looked at administrative data for more than 63,000 individuals over a four-year period. Just under half of those people had life insurance. Their working theory—which was contradicted by the research—was that wealthier people could be expected to buy less insurance, simply because they could self-insure through savings instead.
In fact, the opposite was true. The economists, Michael Gropper and Camelia Kuhnen, wrote that “Whether we measure wealth by the value of financial assets, or by the value of the homes individuals own, we find that life insurance coverage as well as property insurance coverage increases with wealth, controlling for the value of the insured asset.”2 By their estimate, for every $1 increase in someone’s financial wealth, there was a 68-cent increase in the amount of their term life insurance coverage limit.
They found that wealth-related differences in things like potential legal liability, liquidity constraints, employer-provided benefits and financial literacy explain only a small fraction of the positive correlation between wealth and insurance.
They also noted that there are monitoring and other costs that come when you purchase insurance, something that wealthy people might be expected to want to avoid, but there was no evidence that this was a factor.
The same phenomenon applies to casualty insurance. Gropper and Kuhnen found that when they measured wealth by the value of the homes individuals own, property insurance coverage also increases with wealth, even after controlling for the value of the insured asset.
The authors reach a startling conclusion. The fact that the less wealthy have less insurance coverage, even though they would theoretically benefit more from it, is something that might increase financial disparities among households.
Note that the researchers did not look at what is the ideal amount of life insurance, or whether participants were underinsured or overinsured.
Nor did they reference when people purchase life insurance. Life insurance is, of course, considerably less expensive at younger ages. It is possible that wealthier individuals might purchase more coverage at a younger age, in anticipation of a greater need over time as their wealth increases.
The bottom line here is that, as the authors state, insurance coverage “is a critical aspect of the financial health of households.”
Is your insurance coverage in line with your long-term goals? To help you reach your financial goals, you need a skilled professional by your side. Contact your Security Mutual life insurance advisor today. As part of the planning process, they can coordinate with your other advisors as needed to help you achieve your financial goals and objectives.
1Gropper, Michael J. and Camelia M. Kuhnen. “Wealth and Insurance Choices: Evidence From US Households.” National Bureau of Economic Research, July 2021. https://www.nber.org/papers/w29069 (accessed August 29, 2021).
2Bell, Allison. “Household Life Insurance Gap Puzzles Economists.” ThinkAdvisor.com, August 9, 2021. https://www.thinkadvisor.com/2021/08/09/household-life-insurance-gap-puzzles-economists/?kw=Household%20Life%20Insurance%20Gap%20Puzzles20Economists&utm_source=email&utm_medium=enl&utm_campaign=lifehealthnewsflash&utm_content=20210809&utm_term=tadv (accessed August 29, 2021).
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