Determinants of Household Life Insurance Premium Expenditures: An Empirical Investigation

In this paper, the relationships between life insurance premium expenditures and various economic and demographic characteristics of households are examined in the context of cross-sectional data. Income, net worth holdings, and stage in the life cycle of the household and education and occupation of the household head are generally determined to be significantly related to premium expenditures. Estimates of the variable coefficients in a linear model and estimates of the income elasticity of premium expenditures are provided. Differences in life insurance premium expenditures among households are of interest because of their implications regarding the life insurance industry's effectiveness and potential. Yet, little is known about the factors which determine individual purchases of life insurance. While life insurance institutions publish data on various measures, mostly aggregate, of life insurance consumption, they provide little or no data which give meaningful insights into the determinants of individual expenditures on premiums. Few attempts have been made by researchers to analyze the relationships between variables associated with life inJ. D. Hammond, Ph.D., C.L. U. , is Associate Professor of Business Administration in Pennsylvania State University. Formerly on the faculty of Ohio State University, Dr. Hammond is Assistant Editor of the Journal of Risk and Insurance. David B. Houston, Ph.D., is Associate Professor of Economics in the University of Pittsburgh. Dr. Houston was formerly on the faculty of the Graduate School of Business Administration of the University of California at Los Angeles and the Pennsylvania State University. E. R. Melander, Ph.D., is Assistant Professor of Business Statistics in Pennsylvania State University. Dr. Melander was formerly on the faculty of the University of Minnesota. This article was submitted in April, 1967. surance consumption and expenditures by families on premiums. ' In general, the demand function for individual life insurance has not been studied and attempts to determine income and price elasticities of life insurance have not been undertaken.2 ' There are, however, at least three notable studies: Life Insurance Ownership Among American Families (Ann Arbor: Survey Research Center, Institute of Social Research, University of Michigan, 1957), a study by Kreinin, Lansing, and* Morgan, "Analysis of Life Insurance Premiums," Review of Economics and Statistics, February, 1957, and some analysis by Katona, Lininger, and Mueller in 1964 Survey of Consumer Finances (Ann Arbor: Survey Research Center, Institute of Social Research, University of Michigan, 1965). The first study, on pages 79-83, utilizes multiple regression analysis to study the effects of income, veteran status, urbanrural status, occupation, and life-cycle upon life insurance premium expenditures among households in the Survey Research Center Sample. These regression results are referred to later in our paper. The second study utilizes variance analysis in determining, among other things, that life cycle is important in determining the ratio of premiums to income and that city size also has a positive effect upon that ratio. The third study utilizes multivariate analysis of data collected for family units rather than for spending units as in earlier surveys conducted by the Survey Research Center. 2 A very recent study is an exception. Muzaffer