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 ID: 505063
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Slide1
The Demand for Disability Insurance
By Janine K. ScottSlide2
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.
IntroductionSlide3
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/JustificationSlide4
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)
BackgroundSlide5
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.)Slide6
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.TheorySlide7
The 2007 Survey of Consumer Finances (SCF) will be used
Household demographic and financial characteristics on 4,418 respondents
DataSlide8
Demand for
disability insurance
= f (need & awareness)
Financial sophistication and the use of a financial advisor serve as proxies for awareness. Conceptual FrameworkSlide9
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 VariablesSlide10
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
HypothesesSlide11
log (pi/1- p
i
) = β0+ β1
Sophistication
i +β2 Financial Professionali + β3Financial Characteristicsi + β4Attitude/Expectations
i
+β5
Demographics
i + εiModelSlide12
Descriptive Statistics
Employed Households
with Insurance
(%)
Employed Households
without
Insurance (%)
Ownership of disability insurance (dependent)
41.59
58.41
Financial Sophistication Quintile 1
27.96
33.20
Financial Sophistication Quintile 2
24.91
20.54
Financial Sophistication Quintile 3
17.10
17.74
Financial Sophistication Quintile 4
16.11
13.93
Financial Sophistication Quintile 5
13.93
14.59
Financial Planner
14.87
8.43
Risk Averse
24.44
40.30
Risk Tolerant
75.56
59.70
Low Income (<$35,150)
14.82
38.40
Mid-Low Inc. ($35,150-$90,800)
48.19
41.29
High Inc. (>$288,350)
5.24
2.17
Self-insure
31.43
42.26
Size of company (<20 employees)
13.00
37.87Slide13
Descriptive Statistics
Employed Households
with Insurance
(%)
Employed Households
without
Insurance (%)
Ownership of disability insurance (dependent)
41.59
58.41
Size of company (20-99 employees)
13.16
17.09
Size of company (100-499)
16.63
13.30
Size of company (≥500)
57.22
31.74
Age (≤35 years)
24.05
32.65
Age (36-40)
13.10
11.55
Age (41-45)
13.47
12.91
Age (46-50)
16.19
12.72
Age (51-55)
14.24
10.34
Age (56-60)
10.72
7.82
Age (61-65)
5.14
5.70
Age (>65 years)
3.09
6.30
Self-employed
8.37
18.30
Professional/Managerial
48.63
32.21Slide14
Results
Regression Results Predicting Disability Insurance Demand for Employed Households (
N=3,319
)
Variables
Parameter Estimate
P-value
Odds Ratio
Own Disability Insurance
(
dependent
)
Use of Professional
Financial Planner
0.2677
0.0000***
1.307
Banker
0.0951
0.0239*
1.100
Accountant
0.0052
0.9525
1.005
Broker
-0.0192
0.7724
0.981
Financial Sophistication (Highest Quintile)
<20th percentile
0.0726
0.1928
1.004
20 - 40th percentile
-0.0560
0.3129
0.946
40 - 60th percentile
0.0040
0.9391
1.004
60 - 80th percentile
0.1049
0.0264*
1.111Slide15
Other significant variables include:College (+)
Self-insurability (-)
Single female (-)All income levels (+)Planned retirement age (+)
Health (+)
Self-employment status (-)Company size (+)Results (cont.)