Wealth and Insurance Choices: Evidence from US Households
Theoretically, wealthier people should buy less insurance, and should self-insure through saving instead, as insurance entails monitoring costs. Here, we use administrative data for 63,000 individuals and, contrary to theory, find that the wealthier have better life and property insurance coverage. Wealth-related differences in background risk, legal risk, liquidity constraints, financial literacy, and pricing explain only a small fraction of the positive wealth-insurance correlation. This puzzling correlation persists in individual fixed-effects models estimated using 2,500,000 person-month observations. The fact that the less wealthy have less coverage, though intuitively they benefit more from insurance, might increase financial health disparities among households.
Support for this work has been provided by the Kenan-Flagler Business School at the University of North Carolina at Chapel Hill. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.