Overcoming Barriers to Life Insurance Coverage: A Behavioral Approach

• Author: April Yanyuan Wu,Norma B. Coe,Anek Belbase
• Date: 01 September 2016
• DOI: http://doi.org/10.1111/rmir.12064
• Published date: 01 September 2016

Risk Management and Insurance Review

C

Risk Management and Insurance Review, 2016, Vol.19, No. 2, 307-336

DOI: 10.1111/rmir.12064

OVERCOMING BARRIERS TO LIFE INSURANCE COVERAGE:

AB

EHAVIORAL APPROACH

Norma B. Coe

Anek Belbase

April Yanyuan Wu

ABSTRACT

While life insurance purchase decisions have long been studied, we still do not

know how people decide if they need insurance or how much they need. Using

in-depth interviews, we peer into the black box of employee decision making to

learn what people know about this employee benefit, and how they decide if it

is of value for them. Wefind that individuals understand the need for life insur-

ance, but find many behavioral economic barriers to getting adequate coverage,

including mental accounting, money illusion, and a strong role of defaults.

We then conduct an online experiment of the hypothetical employee-benefit

purchase scenario, and find a few, simple interventions could help individuals

better decide their life insurance needs.

INTRODUCTION

Researchers have been examining the life insurance decision for almost 50 years, culmi-

nating in a long, but not yet unified, literature aimed at explaining life insurance demand

(see Zietz, 2003, for a review). Most of this work has focused on traditional economic

factors for the demand for life insurance, such as age, education, children, net worth,

Social Security, stock returns, and price of the insurance product. While most of these

factors have been found to have a significant correlation with life insurance purchase

or amount, most of them have also been found to have both a negative and a positive

relationship, depending on the study in question.

The nature of life insurance and the risk it insures make the coverage decision very

susceptible to decision limitations posited by behavioral finance, yet these explanations

Norma B. Coe works at the University of WashingtonSchool of Public Health and NBER; phone:

206-616-8530; email: nbcoe@uw.edu. Anek Belbase works at the Center for Retirement Research

at Boston College. April Yanyuan Wu works at Mathematica Policy Research. The research

reported herein was pursuant to a grant from Prudential Financial. The authors would also like

to acknowledge the Harvard Center for Risk Analysis for its financial support. The findings

and conclusions expressed are solely those of the authors and do not represent the views of

Prudential, the University of Washington, Mathematica Policy Research, or Boston College.

The authors would like to thank participants of the Harvard Center for Risk Analysis’s Risk,

Perception, and Response conference for their helpful comments. All errors are their own.

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308 RISK MANAGEMENT AND INSURANCE REVIEW

for the low coverage remain largely unexplored.1Forexample, early death is not pleasant

to think about, making the coverage decision prone to procrastination or other avoidance

strategies. It is also a relatively low-probability event, which decision makers are prone

to overdiscount. Benefits are often framed in terms of a large lump sum, which could

suffer from money illusion problems and lead to lower insurance coverage. While the

group life insurance market comprises around 40 percent of the overall life insurance

market, very little is known about how individuals determine how much life insurance

to purchase and select their benefits packages, or if their selections are optimal for their

situation.

This study is twofold. First, we conduct in-depth interviews to shed light into the

prevalence of behavioral finance concepts at play when employees make decisions

regarding their life insurance benefits. This allows us to identify behavioral barriers

to getting appropriate coverage levels. We explore the prevalence of mental shortcuts,

rules of thumb, risk misperception, as well as assess the potential influence of anchoring,

framing, and signaling in the take-up and coverage decisions.

Second, we conduct a hypothetical online experiment to test whether behavioral finance

tools could impact decision making when selecting life insurance coverage as part of

an employee-benefits package. We develop several “treatment” enrollment scenarios

based on the barriers identified in the interviews and grounded in well-established

behavioral finance concepts (Kahneman and Tversky,1979, 1986; Kahneman et al., 1982;

Wilson et al., 1996; Mullainathan and Thaler, 2000; Mussweiler et al., 2004). We estimate

the effect of each treatment on both the intensive margin (insurance take-up) and the

extensive margin (the amount of insurance selected), compared to a baseline enrollment

scenario based on the existing communication practices of a major insurance provider.

This study is an important first step in not only understanding how individuals decide

on their life insurance coverage, but also identifying potential interventions that could

help counter the behavioral barriers that are leaving employees increasingly financially

vulnerable. As of the second quarter of 2015, health insurance is costing employers

8.4 percent of total compensation, while life insurance is a mere 0.1 percent (Bureau of

Labor Statistics [BLS], 2015). The benefit landscape will continue changing due in part to

the employer mandate within the Affordable Care Act (ACA). Employers may transition

to new benefit models in response, which would have implications for nonmedical group

benefits as well (American Council of Life Insurers [ACLI}, 2013). The recent emphasis

on health insurance may mean that other important insurance benefits increasingly get

short-changed in the future. Identifying and implementing appropriate interventions

now could help to increase the financial stability of households.

This article continues as follows. The “The Life Insurance Market” section discusses

the life insurance market and some recent trends within the employer-sponsored group

benefits landscape. The “How Workers Decide on Their Life Insurance Coverage” sec-

tion discusses how individuals decide on life insurance coverage, as illuminated by

24 in-depth interviews. The “Does Behavioral Economics Tell Us How to Help People

1Burnett and Palmer (1984) examine nontraditional explanations for the demand for life insur-

ance, including lifestyle, fatalism, religious salience, and socialization preferences, but not all of

these concepts easily align with behavioral finance theories.