Incidental Bequests: Bequest Motives and the Choice to Self-Insure Late-Life Risks∗

Retirees face significant uncertainty about how long they will live and, in many countries, how much costly health care they will require. Yet few buy life annuities or long-term care insurance to insure these risks. Low rates of long-term care insurance coverage are often interpreted as evidence against the importance of bequest motives since failing to buy insurance exposes bequests to significant risk. In this paper, however, I find that low rates of long-term care insurance coverage, especially in combination with the slow rate at which many retirees draw down their wealth, constitute evidence in favor of bequest motives. I use the Method of Simulated Moments to estimate a life cycle model of retirement based on the saving and long-term care insurance decisions of single retirees in the U.S. Retirees’ choices are highly inconsistent with standard life cycle models in which people care only about their own consumption but match well models in which bequests are luxury goods. Such bequest motives reduce the value of insurance by reducing the opportunity cost of precautionary saving. Buying insurance reduces one’s need to engage in precautionary saving, which is most valuable to individuals without bequest motives who wish to consume all of their wealth. The results suggest that bequest motives significantly increase saving and significantly decrease purchases of long-term care insurance and annuities, especially by retirees in the top half of the wealth distribution. ∗Contact: [email protected]. The most up-to-date version of this paper can be found at my website, http://faculty.wcas.northwestern.edu/~lml115/. This paper previously circulated under the title, “The Importance of Bequest Motives: Evidence from Long-term Care Insurance and the Pattern of Saving.” I thank Gadi Barlevy, Marco Bassetto, Gary Becker, Jeffrey Brown, Norma Coe, Mariacristina De Nardi, Amy Finkelstein, Eric French, Lars Hansen, Erik Hurst, John Jones, Ralph Koijen, David Laibson, Robin Lumsdaine, Casey Mulligan, Kevin Murphy, Derek Neal, Emily Oster, Svetlana Pashchenko, James Poterba, Devesh Raval, Mark Shepard, Jonathan Skinner, Heidi Williams, Motohiro Yogo, and many seminar participants for helpful comments. I am grateful to the National Institute on Aging for financial support (training grant 5T32-AG00243 and grant T32-AG000186).