The Life Insurance Demand in a Heterogeneous-Agent Life Cycle Economy Ning Wang, Ph.D. Assistant Professor of Finance University of North Georgia, Dahlonega, GA

TJe fgsd 2019/5/26 Motivations In the insurance market, each life insurance policy is purchased on one household member’s life. The national survey data (SCF) does not contain the division of life insurance holdings between couples. Considering the vast majority of married couples have two wage earners in the US, it is essential to study the division of life insurance holdings between working couples. In literature, the effect of one’s earnings on the spouse’s life insurance holdings remains a subject of debate. Few paper has incorporated joint decisions into a life cycle model to study the risk sharing effect on life insurance holdings between couples. dfdgfffgsd

TJe fgsd 2019/5/26 Main Questions This paper proposes a life cycle model with uncertainty of demographics and income to explore the decision-making of life insurance holdings for different types of households through their lifetime. Obtains the optimal amount of individual life insurance by age and gender for the purpose of lifetime utility maximization. Explores how demographic characteristics and economic factors can affect life insurance demand. dfdgfffgsd

Outline Motivations and Main Questions Literature Review Main Findings TJe fgsd 2019/5/26 Outline Motivations and Main Questions Literature Review Main Findings Model Construction and Calibrations Model Results Conclusions and Future Directions dfdgfffgsd

Literature Review Burnett and Palmer (1984) Chambers et al. (2003) TJe fgsd 2019/5/26 Literature Review Burnett and Palmer (1984) Chambers et al. (2003) Lin and Grace (2007) Low (2005) Fitzgerald (1987) Gandolfi and Miners (1996) Luciano et al. (2016) Chambers et al. (2009, 2011) Nishiyama and Smetters (2005) Nishiyama (2010) dfdgfffgsd

TJe fgsd 2019/5/26 Main Findings The paper contributes to study individual life insurance demand, and finds that the effect of one’s earnings on the spouse’s life insurance depends on the interrelation of their future earnings under mortality risk. The results show that single-parent households peak earlier than the couple households. The results present that life insurance demand is positively related to the number of children and income while ambiguously related to wealth. The results indicate that life insurance demand of a household is dominantly determined by financial vulnerability at its early ages, and by financial supports needed and premiums at its old ages. dfdgfffgsd

Model · Heterogeneous Households TJe fgsd 2019/5/26 Model · Heterogeneous Households Household age The number of children and labor income calibrated are related to household age. Working abilities They are assumed to follow the Markov process. Household marital status Couple household if m=1, Single-father household if m=2, Single-mother household if m=3, and Children-only household if m=4. Beginning-of-period wealth It changes in accord with household saving decision and life insurance payments due to the change of marital status in last period. dfdgfffgsd

Model · Utility Functions TJe fgsd 2019/5/26 Model · Utility Functions Utility functions of single-parent households Child-adult equivalency factor is ½; is the index of the economy scale between 0 and 1. dfdgfffgsd

Model · Optimization Problem TJe fgsd 2019/5/26 Model · Optimization Problem dfdgfffgsd

Calibration · the Number of Children TJe fgsd 2019/5/26 Calibration · the Number of Children Assume all households have the same number of children at each age dfdgfffgsd

Calibration · State Transition Function Working-ability transition function Calibrated by Nishiyama and Smetters (2005) and Nishiyama (2010) Marital status transition process

Result · Household Life Insurance Demand TJe fgsd 2019/5/26 Result · Household Life Insurance Demand dfdgfffgsd

Result · Life Insurance and Risk Aversion

Result · Life Insurance and Mortality Shock

Result · Life Insurance and the Number of Children TJe fgsd 2019/5/26 Result · Life Insurance and the Number of Children dfdgfffgsd

Result · Life Insurance and Wealth & Income

Result · Life Insurance and Wage Shock (Benchmark) TJe fgsd 2019/5/26 Result · Life Insurance and Wage Shock (Benchmark) dfdgfffgsd

Result · Life Insurance and Wage Shock (Experiment I) TJe fgsd 2019/5/26 Result · Life Insurance and Wage Shock (Experiment I) dfdgfffgsd

Result · Life Insurance and Wage Shock (Experiment II) TJe fgsd 2019/5/26 Result · Life Insurance and Wage Shock (Experiment II) dfdgfffgsd

Conclusions and Future Directions TJe fgsd 2019/5/26 Conclusions and Future Directions The paper discusses the determinants of life insurance demand in different types of households by providing some insights into the life cycle relationship between their life insurance holdings and household features. The paper explores the impact of wage shock on the division of life insurance between couples, and contributes to understanding the risk sharing effect on life insurance demand within a household. One of future directions is to discuss the amount and timing puzzles by comparing model results with the SCF data. This study can also be extended to conduct further research on life insurance demand by adding heath shock risk into a life cycle model. dfdgfffgsd

TJe fgsd 2019/5/26 Contact Information: Ning Wang, Assistant Professor of Finance Department of Economics and Finance Mike Cottrell College of Business 82 College Circle, NOC 117 University of North Georgia, Dahlonega, GA 30597 Phone: (706) 867-3048 Email: Ning.Wang@ung.edu THANK YOU ! dfdgfffgsd