The Adequacy of Life Insurance

Jagadeesh Gokhale, Ph.D.
Laurence J. Kotikoff, Boston University

April 2002 | Issue # 72

In this paper, we use an economic approach to determine households' life insurance needs. In the economic approach, life insurance needs and spending targets are simultaneously determined by smoothing households' living standards over their life cycles and ensuring comparable living standards for potential survivors. We demonstrate that life insurance recommendations provided by the economic approach are considerably different from those provided by the conventional approach. When comparing recommended with actual life insurance holdings, we find that under-insurance is widespread among secondary earners in married couples. We also identify a systematic gender bias: for any given level of financial vulnerability, couples provide significantly more protection for wives than for husbands.

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