...the shorter the exemption period, the greater the demand for life insurance. And the greater the demand for life insurance, the higher the suicide rate.
HT: Mollie
Friday, November 13, 2015
Does life insurance cause suicide?
Insurance companies anticipate this kind of moral hazard, and typically include an exception for death by suicide. However, the exception lasts only a few years, and varies by country. Economists compared suicide rates in countries with shorter exceptions and found statistically significant evidence of moral hazard:
HT: Mollie
HT: Mollie
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This is definitely a hard topic as I have suffered from losing my younger brother recently to suicide. I can honestly say there are many reasons for suicide and I don't believe insurance is one of them in todays world. Due to the fact that everything is thoroughly investigated nothing goes unnoticed. Life insurance have clauses that don't pay when a person commits this act. But there are some exclusions that many people don't know. One exclusion is a policy may not pay if the individual committed suicide unless they had the police for two to three years before. This exclusion also depends on who the policy is with. This exclusion is in the policy so people don't take out large amounts of insurance and then commit suicide to increase the families income. Although I would like to believe someone wouldn't commit suicide for that reason I am sure it does happen. Insurance policies are to meant to cover unforeseen death not one that is planned.
ReplyDeleteBy Myeshia Wagner
This is a touchy topic, but you bring up some good points. The idea of life insurance is to ensure that your family is protected when you pass away. Should it really matter how you pass away? I understand the suspected fraud concerns that people can take out a large policy and then commit suicide so their family can collect the money. However, how often does that really happen? I honestly don't feel that this should be an exclusion. For the most part, when someone chooses to end their life, it for for an entirely different reason than their family collecting their insurance policy. As devastating as it is for the families that loose someone to suicide, why should they loose the benefit of life insurance?
ReplyDeleteIf someone attempts suicide and is taken to the hospital, the health insurance still pays, so why should the life insurance be any different?
This is a touchy topic, but you bring up some good points. The idea of life insurance is to ensure that your family is protected when you pass away. Should it really matter how you pass away? I understand the suspected fraud concerns that people can take out a large policy and then commit suicide so their family can collect the money. However, how often does that really happen? I honestly don't feel that this should be an exclusion. For the most part, when someone chooses to end their life, it for for an entirely different reason than their family collecting their insurance policy. As devastating as it is for the families that loose someone to suicide, why should they loose the benefit of life insurance?
ReplyDeleteIf someone attempts suicide and is taken to the hospital, the health insurance still pays, so why should the life insurance be any different?
Whenever suicide is mentioned, there is bound to be strong feelings.
ReplyDeleteI tend to agree that while life insurance may not cause suicide, it might increase the risk of one deciding that their family may be better off if they do. Its sad, because more often than not, the family would rather have the individual there with them, not the policy funds, but… regardless, the moral hazard is there.
I know of one individual who committed suicide exactly one month after the exemption clause expired on his policy. He had blown through his paycheck in a poker game, his wife told him they’d discuss what to do about it in the morning, and she woke up to find him in the garage.
This is just one instance, if he felt his death would provide his family with the funds they needed to ‘survive’ and that his life was just ‘bringing them down’, suicide- sadly- was his answer. Humans are very complicated creatures. We have different wants and needs and tend to be quite emotional.
While studies have shown that people favor a policy with a shorter exemption period, and the ideal situation is it would be irrelevant, the fact is some people commit suicide feeling there is no other answer to whatever they are going through at the time. Suicide is serious, is often spontaneous and impulsive.
Life Insurance is “insurance” after all, and insurance companies need to make a profit as well. I am sure that the health of the individual, the value of the claims, the percentages of payouts, and the investment strategy are all taken into consideration when policy premiums are determined. ACLI states that “75 million American households have life insurance or annuity coverage through life insurance companies, the industry employed about 800,000 persons and created over $162 billion of economic output, and accounted for $224 billion through indirect employment. It is one of the largest investors in US capital markets” (ACLI). Clearly, life insurance, with or without suicide clauses, plays an important role in the American economy.
https://www.acli.com/Issues/Taxes/Documents/EY_ACLI-Life-Insurance-Industry-Contributions.pdf
Sorry, but I do not think this is so complicated. Suicide: yes, complicated. The desire for insurance by someone considering suicide: not complicated. Suicides seem to be planned and not spontaneous. Regardless of the reason(s), the individuals seem to consider those "left behind" by way of notes and other preparations/considerations. Now, insurance as a reason for suicide may not be so common, like in "It's a Wonderful Life". There, George came to realize that the goals he had been trying to attain for his family would most likely be attained by his death because of an insurance policy he had purchased several years earlier. However, in the case of a person considering suicide, the purchase of an insurance policy is a convenient way to apologize and/or compensate those harmed/inconvenienced by the act. Disclaimers and exclusions for suicide are a logical and fair way to protect insurance companies from people who are not purchasing the policy for it's intended purpose: protection from UNFORSEEN causes of death.
ReplyDeleteIt would appear that life insurance has the ability to create that moral hazard increasing the rate of suicide. The moral hazard provides that the customer will act adversely to the norm with the potential to cause harm to themselves, or acting in a fashion not evident to the insurance company. This differs from adverse selection, where information about the insured is kept from the insurance company. Having a life insurance policy and going through the application process was quite arduous. this application did not only ask numerous personal and financial questions it subjected me to a complete physical and evaluation of my current and historic condition. While the opportunity exist for the moral hazard of increased suicide, the insurance company does its best to eliminate and minimize that hazard
ReplyDeleteIn the November 12, 2015 blog “Does life insurance cause suicide,” Froeb points out that when life insurance policies have shorter timeframes in which people are exempted from their benefit due to suicide, there is greater demand for the life insurance and the suicide rate is higher. Froeb calls this a moral hazard. A moral hazard is “the reduced incentive to exercise care once you purchase insurance.” (Froeb, pg 260) So it would appear that purchasing insurance with shorter exemption periods for suicide actually incentivizes people to commit suicide. Economist Shankar Vedantam explains it this way, “instead of telling themselves, I can’t commit suicide because it would destroy my family, could they think, my family is going to be ok…By protecting people against one consequence of suicide, is it possible that you increase the risk people will actually consider suicide?”
ReplyDeleteLife insurance, with its exception period for suicide, does understand there is a moral hazard possible with the purchase of life insurance. Statistics do show the shorter the exemption period the higher the suicide rate, which is certainly disturbing.
ReplyDeleteThe moral hazard involved with life insurance is no different than that of with auto insurance (especially on that supplemental rental car insurance), monetary loans, health insurance, or banking (as seen with subprime debacle). Any scenario where an individual/organization will take risks because the consequences will not be felt by the individual/organization taking the risk is a moral hazard. The result is that sometimes more risks are taken.
“any situation in which one person makes the decision about how much risk to take, while someone else bears the cost if things go badly.”
– Paul Krugman
With life insurance, maybe the increasing of the exception period is an option, but to what length? And in doing so, are families that truly would benefit be excluded? By protecting people against one consequence of suicide, is it possible that you increase the risk people will actually consider suicide?
Is this really just an issue of adverse selection, due to information asymmetry, and if proper screening was done for life insurance candidates then individuals would get the help needed early on and suicide would not be a moral hazard issue?
In my opinion, better screening of candidates would help address the moral hazard associated with life insurance and get individuals the help they need.
References:
https://www.npr.org/2015/11/12/455717464/can-life-insurance-affect-the-propensity-to-commit-suicide
http://newsroom.afba.com/military-life/military-life-insurance-might-play-role-in-suicides/