Prudence, Risk Aversion, and the Demand for Life Insurance

Prudence is the idea of taking precautionary measures when one encounters a situation of risk, whereas risk aversion is a dislike and avoidance of risk. The goal of this article is to create a ratio of prudence to risk aversion. This was done by using survey data from Wave 1 (1992) of the Health and Retirement Study and applying it to a model of the expected utility of life insurance. It is found that as people near retirement the amount of coverage they receive by insurers decreases. Households that have term insurance on the head of the household tend to have greater risk aversion then those households that do not have such insurance.