The Mismatch Between Life Insurance Holdings and Financial Vulnerabilities: Evidence from the Health and Retirement Survey

Using data on older workers from the 1992 Health and Retirement Survey, along with an elaborate life-cycle planning model, the authors quantify the effect of each individual's death on the financial status of his or her survivors and the degree to which life insurance holdings moderate these consequences. The average change in living standard that would result from a spouse's death is small, both in absolute terms and relative to the decline that would occur without insurance. However, this average obscures a startling mismatch between insurance holdings and underlying vulnerabilities. For many of the most vulnerable, the amounts purchased are surprisingly small, and for many of the least vulnerable, the amounts are surprisingly large. As a result, uninsured vulnerabilities are quite widespread. The magnitude of these vulnerabilities, as well as the proclivity to address any given degree of vulnerability by purchasing life insurance, vary systematically with individual and household characteristics.