Academic journal article Contemporary Economic Policy

Life Insurance Holdings and Well-Being of Surviving Spouses

Academic journal article Contemporary Economic Policy

Life Insurance Holdings and Well-Being of Surviving Spouses

Article excerpt


Death of a breadwinner can have catastrophic financial consequences for surviving dependents. In the United States, there are high rates of widow poverty with one in five widows being below the federal poverty line (FPL) and evidence of increased labor force participation by surviving dependents (Sevak, Weir, and Willis 2004; Elliott and Simmons 2011; Fadlon and Nielsen 2015). Consequences from premature death like higher poverty, increased labor supply, increased remarriage rates, or reliance on relatives can be mitigated by holding life insurance. To what extent does life insurance fulfill the classic "consumption smoothing" role, in turn reducing other distortions? Although several studies have speculated that increased life insurance coverage would reduce the incidence of poverty for surviving spouses (Auerbach and Kotlikoff 1991; Bernheim et al. 2003), there has been, to date, no direct evidence.

Our study provides such evidence on how life insurance payouts influence surviving spouses, by using 20 years of data from the Health and Retirement Study (HRS). The HRS contains detailed financial information including payouts from life insurance policies and accurate information on the precise date of death. We analyze the well-being of individuals whose spouses died during or soon after his or her peak earnings years, and examine the elderly individual's financial status 3 years following the spouse's death.

We find significant effects of lump-sum life insurance payouts on the well-being of surviving spouses without controlling for socioeconomic factors. Once we control for such factors, there is no significant reduction of poverty for surviving spouses except in the case of very small payouts that are likely provided through employer-sponsored life insurance (ESLI). These findings are consistent with the idea that life insurance payouts are simply a proxy for financial savviness, but do not cause higher long-run financial well-being. One possible explanation for this result is that surviving spouses spend the large financial windfall from life insurance very quickly, mitigating its effect in the medium or long run. Our findings suggest that large lumpsum life insurance payouts may be less effective than annuitized payouts.

In addition to the policy importance, our findings contribute to a literature where commonly assumed causal relationships are either diminished or eliminated with the inclusion of additional covariates, balanced samples, or instrumental variable techniques. Examples include the consequences of subsidized housing (Currie and Yelowitz 2000), military service (Angrist 1990), arrests (Grogger 1995), substance use (Rees, Argys, and Averett 2001), teen pregnancy (Hotz, McElroy, and Sanders 2005), and depression (Cseh 2008).

The remainder of the paper is organized as follows. Section II provides an overview of life insurance markets. Section III describes the data. Section IV provides the empirical specification. Section V presents and discusses our results. Section VI concludes.


Institutional features of the life insurance markets are important for understanding life insurance's influence on the well-being of surviving spouses. Individuals generally pay an annual premium, and their heirs receive a payment if the insured individual dies while covered by life insurance. In 2014, life insurance coverage totaled $20.1 trillion originating from individual and group market coverage (American Council of Life Insurers 2015).

Consumers purchase individual market coverage directly through the insurer and individual coverage constituted 59% of all life insurance in 2014. Individual life insurance is mainly separated into term and whole life coverage policies. Term life insurance provides coverage for a specified period of time (typically ranging from 10 to 30 years) and pays the face value of the policy upon death of the policyholder. …

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