TAILIEUCHUNG - WHY DO LIFE INSURANCE POLICYHOLDERS LAPSE? THE ROLES OF INCOME, HEALTH AND BEQUEST MOTIVE SHOCKS

In conducting their operations, farmers are exposed to financial losses because of production risks—droughts, floods, and other natural disasters—as well as price risks. The federal government has played an active role in helping to mitigate the effects of these risks on farm income by promoting the use of crop insurance. RMA has overall responsibility for administering the federal crop insurance program, including controlling costs and protecting against fraud, waste, and abuse. RMA partners with 15 private insurance companies that sell and service the federal program’s insurance policies and share a percentage of the risk of loss and opportunity for gain. | NBER WORKING PAPER SERIES WHY DO LIFE INSURANCE POLICYHOLDERS LAPSE THE ROLES OF INCOME HEALTH AND BEQUEST MOTIVE SHOCKS Hanming Fang Edward Kung Working Paper 17899 http papers w17899 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge MA 02138 March 2012 We have received helpful comments and suggestions from Steven Berry Xu Cheng Han Hong Aprajit Mahajan Panle Jia Alessandro Lizzeri Jim Poterba Xun Tang Ken Wolpin Motohiro Yogo and seminar conference participants at New York University Cowles Foundation Summer Conference in Structural Microeconomics 2010 AEA CEANA 2011 and SED 2012 for many helpful comments questions and suggestions. Fang would also like to gratefully acknowledge the generous financial support from the National Science Foundation through Grant SES-0844845. All remaining errors are our own. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications. 2012 by Hanming Fang and Edward Kung. All rights reserved. Short sections of text not to exceed two paragraphs may be quoted without explicit permission provided that full credit including notice is given to the source. Why Do Life Insurance Policyholders Lapse The Roles of Income Health and Bequest Motive Shocks Hanming Fang and Edward Kung NBER Working Paper No. 17899 March 2012 JEL No. G22 H31 L11 ABSTRACT Previous research has shown that the reasons for lapsation have important implications regarding the effects of the emerging life settlement market on consumer welfare. We present and empirically implement a dynamic discrete choice model of life insurance decisions to assess the importance of various factors in explaining life insurance lapsations. In order to explain some key .

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