The Adequacy of Life Insurance Evidence from the Health and Retirement Survey

This study examines life insurance adequacy among married American couples approaching retirement based on the 1992 Health and Retirement Survey with matched Social Security earnings histories. It evaluates each household’s life insurance needs based on new financial planning software that embodies a life-cycle-planning model and covers a broad array of demographic, economic, and financial characteristics. A sizable minority of households are significantly underinsured. Almost one third of wives and over 10 percent of husbands would have suffered living-standard reductions greater than 20 percent had their spouses died in 1992. Under-insurance seems more common among low-income households, couples with asymmetric earnings, younger households, couples with dependent children, and non-whites. In general, households with greater vulnerabilities do not compensate adequately through greater life insurance holdings. Among some groups, the frequency of under-insurance exceeds two-thirds, and the frequency of severe under-insurance (a reduction in living standard of 40 percent or greater) exceeds one-quarter.