1. The Demand for Disability Insurance By Janine K. Scott

2.  Hedges against the loss of human capital include disability and life insurance.  However, prior research shows that many households are deficient in ownership.  Academics and financial professionals can aid in bridging the gap between normative and descriptive household behavior. Introduction

3.  The Consumer Disability Awareness survey estimates that 3 out of 10 American workers entering the market will become disabled before retirement (CDA, 2010).  Within the U.S., less than half of households own disability insurance.  Financial sophistication and professional advice can greatly impact demand. Purpose/Justification

4.  Human capital is often the largest household asset (Ibbotson, Milevsky, Chen & Zhu, 2007; Campbell, 2006; Washer & Nippani, 2004; Lee & Hanna, 1995)  Earnings alongside investment risk needs to be taken into account (Angerer & Lam, 2006; Bodie, Merton, Samuelson, 1992)  Demand depends on: expected benefits, the price of insurance, prices of substitutes, and the desire to leave a bequest (Sloan & Norton, 1997) Background

5.  Escalating costs due to potential losses: increased medical expenses, loss of employee benefits, additional child care and possibly nursing home care (Cox, 1991)  Demand barriers include :  Unawareness of need (Ibbotson et al., 2007)  Lack of financial sophistication (Cutler & Zeckhauser, 2004; Showers & Shottick, 1994; Hanna, 1989; Machina 1987; Tversky & Kahneman 1987; Hanna, 1989)  Saliency issues (Washer & Nippani, 2004)  Supply side issues (Brown & Finkelstein, 2004b)  Existence of public insurance and other factors (Brown & Finkelstein, 2004a) Background (cont.)

6.  Disability insurance helps transfer resources from periods of low marginal utility of consumption to periods where marginal utility is higher (Bodie, Treussard, & Willen, 2007; Arrow, 1953; Debreu, 1953).  The shape of a household’s utility function of prompts insurance preferences and decision-making (Hanna, 1989).  Human capital theory suggests that the use of a financial planner can substitute for a lack of individual human capital. Theory

7.  The 2007 Survey of Consumer Finances (SCF) will be used  Household demographic and financial characteristics on 4,418 respondents Data

8. Demand for disability insurance = f (need & awareness)  Financial sophistication and the use of a financial advisor serve as proxies for awareness. Conceptual Framework

9.  The SCF asks the respondent if they “have any type of insurance other than Social Security that would help provide income in the event that they became disabled.”  Financial sophistication variables: stock ownership, willingness to accept risk, understanding of personal finance, and total credit limit (Huston, Finke & Smith, 2012)  The use of a financial planner is also included. Measurement of Dependent & Independent Variables

10.  It is likely that greater need and awareness will have a positive effect on demand for disability insurance.  Households with greater financial sophistication are more likely to demand insurance  Households with a financial planner are more likely to demand insurance Hypotheses

11. log (p i /1- p i ) = β 0 + β 1 Sophistication i +β 2 Financial Professional i + β 3 Financial Characteristics i + β 4 Attitude/Expectations i +β5 Demographics i + ε i Model

12. Descriptive Statistics Employed Households with Insurance (%) Employed Households without Insurance (%) Ownership of disability insurance (dependent)41.5958.41 Financial Sophistication Quintile 127.9633.20 Financial Sophistication Quintile 224.9120.54 Financial Sophistication Quintile 317.1017.74 Financial Sophistication Quintile 416.1113.93 Financial Sophistication Quintile 513.9314.59 Financial Planner14.878.43 Risk Averse24.4440.30 Risk Tolerant75.5659.70 Low Income (<$35,150)14.8238.40 Mid-Low Inc. ($35,150-$90,800)48.1941.29 High Inc. (>$288,350)5.242.17 Self-insure31.4342.26 Size of company (<20 employees)13.0037.87

13. Descriptive Statistics Employed Households with Insurance (%) Employed Households without Insurance (%) Ownership of disability insurance (dependent)41.5958.41 Size of company (20-99 employees)13.1617.09 Size of company (100-499)16.6313.30 Size of company (≥500)57.2231.74 Age (≤35 years)24.0532.65 Age (36-40)13.1011.55 Age (41-45)13.4712.91 Age (46-50)16.1912.72 Age (51-55)14.2410.34 Age (56-60)10.727.82 Age (61-65)5.145.70 Age (>65 years)3.096.30 Self-employed8.3718.30 Professional/Managerial48.6332.21

14. Results Regression Results Predicting Disability Insurance Demand for Employed Households (N=3,319) VariablesParameter EstimateP-valueOdds Ratio Own Disability Insurance (dependent) Use of Professional Financial Planner0.26770.0000***1.307 Banker0.09510.0239*1.100 Accountant0.00520.95251.005 Broker-0.01920.77240.981 Financial Sophistication (Highest Quintile) <20th percentile0.07260.19281.004 20 - 40th percentile-0.05600.31290.946 40 - 60th percentile0.00400.93911.004 60 - 80th percentile0.10490.0264*1.111

15.  Other significant variables include:  College (+)  Self-insurability (-)  Single female (-)  All income levels (+)  Planned retirement age (+)  Health (+)  Self-employment status (-)  Company size (+) Results (cont.)