The Demand for Disability Insurance By Janine K. Scott

 Hedges against the loss of human capital include disability and life insurance.  However, prior research shows that many households are deficient in ownership.  Academics and financial professionals can aid in bridging the gap between normative and descriptive household behavior. Introduction

 The Consumer Disability Awareness survey estimates that 3 out of 10 American workers entering the market will become disabled before retirement (CDA, 2010).  Within the U.S., less than half of households own disability insurance.  Financial sophistication and professional advice can greatly impact demand. Purpose/Justification

 Human capital is often the largest household asset (Ibbotson, Milevsky, Chen & Zhu, 2007; Campbell, 2006; Washer & Nippani, 2004; Lee & Hanna, 1995)  Earnings alongside investment risk needs to be taken into account (Angerer & Lam, 2006; Bodie, Merton, Samuelson, 1992)  Demand depends on: expected benefits, the price of insurance, prices of substitutes, and the desire to leave a bequest (Sloan & Norton, 1997) Background

 Escalating costs due to potential losses: increased medical expenses, loss of employee benefits, additional child care and possibly nursing home care (Cox, 1991)  Demand barriers include :  Unawareness of need (Ibbotson et al., 2007)  Lack of financial sophistication (Cutler & Zeckhauser, 2004; Showers & Shottick, 1994; Hanna, 1989; Machina 1987; Tversky & Kahneman 1987; Hanna, 1989)  Saliency issues (Washer & Nippani, 2004)  Supply side issues (Brown & Finkelstein, 2004b)  Existence of public insurance and other factors (Brown & Finkelstein, 2004a) Background (cont.)

 Disability insurance helps transfer resources from periods of low marginal utility of consumption to periods where marginal utility is higher (Bodie, Treussard, & Willen, 2007; Arrow, 1953; Debreu, 1953).  The shape of a household’s utility function of prompts insurance preferences and decision-making (Hanna, 1989).  Human capital theory suggests that the use of a financial planner can substitute for a lack of individual human capital. Theory

 The 2007 Survey of Consumer Finances (SCF) will be used  Household demographic and financial characteristics on 4,418 respondents Data

Demand for disability insurance = f (need & awareness)  Financial sophistication and the use of a financial advisor serve as proxies for awareness. Conceptual Framework

 The SCF asks the respondent if they “have any type of insurance other than Social Security that would help provide income in the event that they became disabled.”  Financial sophistication variables: stock ownership, willingness to accept risk, understanding of personal finance, and total credit limit (Huston, Finke & Smith, 2012)  The use of a financial planner is also included. Measurement of Dependent & Independent Variables

 It is likely that greater need and awareness will have a positive effect on demand for disability insurance.  Households with greater financial sophistication are more likely to demand insurance  Households with a financial planner are more likely to demand insurance Hypotheses

log (p i /1- p i ) = β 0 + β 1 Sophistication i +β 2 Financial Professional i + β 3 Financial Characteristics i + β 4 Attitude/Expectations i +β5 Demographics i + ε i Model

Descriptive Statistics Employed Households with Insurance (%) Employed Households without Insurance (%) Ownership of disability insurance (dependent) Financial Sophistication Quintile Financial Sophistication Quintile Financial Sophistication Quintile Financial Sophistication Quintile Financial Sophistication Quintile Financial Planner Risk Averse Risk Tolerant Low Income (<$35,150) Mid-Low Inc. ($35,150-$90,800) High Inc. (>$288,350) Self-insure Size of company (<20 employees)

Descriptive Statistics Employed Households with Insurance (%) Employed Households without Insurance (%) Ownership of disability insurance (dependent) Size of company (20-99 employees) Size of company ( ) Size of company (≥500) Age (≤35 years) Age (36-40) Age (41-45) Age (46-50) Age (51-55) Age (56-60) Age (61-65) Age (>65 years) Self-employed Professional/Managerial

Results Regression Results Predicting Disability Insurance Demand for Employed Households (N=3,319) VariablesParameter EstimateP-valueOdds Ratio Own Disability Insurance (dependent) Use of Professional Financial Planner ***1.307 Banker *1.100 Accountant Broker Financial Sophistication (Highest Quintile) <20th percentile th percentile th percentile th percentile *1.111

 Other significant variables include:  College (+)  Self-insurability (-)  Single female (-)  All income levels (+)  Planned retirement age (+)  Health (+)  Self-employment status (-)  Company size (+) Results (cont.)