If there’s one lesson to draw from the past couple of years, it’s to expect the unexpected. Hundreds of thousands of American families have lost loved ones prematurely to the COVID-19 pandemic, and thousands more lost their homes to the fires and storms that have grown ever more frequent, and ever more destructive, across our country.
While the loss of human life and personal property is always devastating, it doesn’t have to cause financial ruin. That’s what insurance is for — and what makes it such a critical part of a household’s financial portfolio. But until recently, little has been known about who purchases life and property insurance — and who does not.
Economists have theorized that wealthier individuals may purchase less life and property insurance because they can rely on their savings if something unexpected happens. However, a new study of more than 63,000 people shows that, in practice, quite the opposite is true.
“Surprisingly, we found that people who are the best covered through life insurance and property insurance are those who have the highest amount of wealth, whether that wealth is measured in terms of financial holdings or home value,” said UNC Kenan-Flagler Business School Professor Camelia M. Kuhnen, who conducted the research with doctoral candidate Michael Gropper.
The study, which is published in the working paper Wealth and Insurance Choices: Evidence from US Households, suggests disparities in insurance coverage could help explain and exacerbate existing financial inequalities. The least wealthy families have less insurance coverage even though they stand to benefit from it the most. This means that when tragedy strikes, the wealth gap only widens.
Studying how wealth influences insurance coverage is challenging because it is difficult to obtain the necessary data. In the new study, the researchers collaborated with a financial institution to obtain data for about 63,000 people from 2015 to 2019. This included information on their insurance coverage, where they live, and overall financial health. A person’s wealth was based on the value of their financial assets held in checking, savings and investment accounts, or the value of their home if they own one.
Based on these observations, the researchers estimated that each $1 increase in financial wealth led to an increase of 68 cents in a person’s term life insurance coverage limit and a $2.25 higher coverage limit for their homeowners insurance policy. Wealthier households are substantially better cushioned against the financial burdens of a death or damage to their home, not only because they have savings in the bank but because of the higher insurance payouts they receive.
“Insurance is supposed to help households deal with negative shocks,” said Kuhnen. “The fact that those who need insurance the most aren’t purchasing it as much could make wealth inequality become worse than it is now. We need to learn more so that policymakers can begin to address this issue.”
To explain these puzzling findings, the researchers examined how financial literacy, available cash and levels of financial risks differed between those with more or less wealth. While these factors accounted for some of the disparity, they didn’t explain it completely.
So, what if it’s not a matter of choice, but access? The data used in the new study didn’t allow researchers to analyze who was offered which insurance products, but Kuhnen notes that it might be more difficult for low-wealth households to find the right insurance products, for example, or that insurance providers might be less inclined to work with these households.
“We want to work with industry associations and insurance providers to obtain data that would allow us to examine how access to insurance might factor into the amount of insurance people purchase,” Kuhnen said. “I want to understand whether households are aware of insurance products; which households are searching for them and how; and how the financial institutions that offer these products reach people from different communities or with different demographics.”
While the research reveals a clear gap in insurance coverage between wealthier and less wealthy households, Kuhnen says more work is needed to tease out what this means for the financial health of individual households. Do those with less wealth actually have too little insurance, or are people with more wealth purchasing too much? As we look ahead and attempt to prepare for the myriad other unexpected events the future may hold, this answer could play a big role in the long-term trajectory of wealth disparities in the United States.
“These new findings are just the beginning of our research to understand both the demand and supply side of insurance,” Kuhnen said. “This information could help policymakers figure out if there are issues that could be addressed, which might help lessen financial inequality over the long term.”