Understanding the Shift in Demand for Cash Value Life Insurance

Life insurance is a tool that households use to hedge against the uncertainty of labor income flows over the life cycle and to meet bequest motives. While overall demand for life insurance continues a 50-year downward trend, term life insurance has gained in popularity over cash value insurance in the last 18 years. The popular press and some literature about life insurance demand suggest the change in demand is mainly driven by changing demographics, shifting life insurance marketing efforts, and changes in timing of family formation. This paper attempts to identify exogenous factors influencing the demand for cash value life insurance beyond the demographic factors and changing marketing efforts. Using the 1992 through 2010 SCFs and logistic regression, we find that the introduction of tax-advantaged retirement and education savings plans in the late 1990s is reducing the need for cash value life insurance. We find increased demand for cash value life insurance for households vulnerable to estate taxes after 2001 despite increased estate tax exemptions. We also find evidence that more highly financially sophisticated households are more likely to own the more sophisticated cash value life insurance products.