Effect of Subjective Mortality Risk on Demand for Life Insurance: Two-Stage Least Squares Analysis Using the Early Death of a Parent as an Instrumental Variable

The life insurance market, one of the largest private insurance sectors globally, lacks sufficient empirical studies on adverse selection, resulting in inconclusive findings from comparisons of insured and uninsured mortality rates. Using the 2006–2020 dataset from the Korean Longitudinal Study of Aging, this study employs the early death of a parent (i.e., before age 50) as an instrumental variable to examine how adult children’s subjective probability of survival to age 75 affects their demand for life insurance. The empirical results from a two-stage least squares analysis reveal that adult children who experience the early death of a parent estimate their probabilityof survival to age 75 to be 7.89%p lower than those who do not, thus influencing their demand for life insurance. These results indicate that consumers incorporate asymmetric information into their life insurance decision-making.