The Sticky Policy: Liquidity, Bequest Motives, and The Intensive Margin of Life Insurance Demand

Abstract

This paper examines the effect of economic downturns on U.S. life insurance market outcomes using a Two-Way Fixed Effects framework on 2004-2019 state-level panel data. Classical theory predicts greater insurance coverage following heightened household risk aversion during downturns, but households often lapse their policies to meet tighter liquidity constraints. Furthermore, demographic-dependent bequest motives nuance the effect on life insurance versus other insurance lines. Empirically, increased unemployment results in decreased insurance purchases, premiums, and policy values, but does not affect life insurance policies per capita, whereas other forms of insurance experience policy lapses. This pattern suggests the reduction of per-policy coverage amounts, with effects concentrated among higher-income states with more elderly or children. This paper’s findings indicate that the effect of liquidity constraints dominates that of heightened risk aversion in recessions. Furthermore, life insurance policies themselves are sticky, instead reacting through the coverage per policy.