Life Insurance and the Life Cycle∗

This paper explores life insurance holdings from a general equilibrium perspective. Drawing on the data explored in Chambers, Schlagenhauf, and Young (2003), we calibrate an overlapping generations lifecycle economy with incomplete asset markets to match facts regarding the uncertainty of income and demographics. We then estimate that life insurance holdings for the purpose of smoothing family consumption are so large that they constitute a puzzle from the perspective of standard economic theory. Furthermore, the welfare gains ∗ We would like to thank participants in seminars at Clemson, Florida State, Iowa, Tokyo, Virginia, Wharton, the 2003 Winter Econometric Society, the 2003 Midwest Macro Meetings, the 2004 SED Meetings, and the Atlanta, Minneapolis, and Richmond Feds as well as thanks to Andy Abel, Fernando Alvarez, Jesus Fernández-Villaverde, Carlos Garriga, Ed Green, Stuart Low, Dave MacPherson, David Marshall, Chris Phelan, Ned Prescott, and especially Ed Prescott and Víctor Ríos-Rull for helpful comments. We would also like to thank Charles Grassl, Curtis Knox, and Joe Travis for computational assistance and tips. Young would like to thank the Florida State University FYAP program and the Bankard Fund for Political Economy at Virginia for financial support. All remaining errors remain our errors. † Email: [email protected]. ‡ Email: [email protected] § Corresponding author. Email: [email protected].