To Smooth or Not to Smooth: Consumption Responses to Life Insurance Payouts
There is a sizable academic literature studying the demand for life insurance products. Little is known, however, about how surviving spouses utilize life insurance payouts. We study individuals 50 and older and ask how they adjust their savings, spending, and bequest behavior after life insurance payouts are received. We show that, compared to widow(er)s not receiving payouts, widow(er)s receiving life insurance payouts do not experience shocks to consumption. We also show substantial heterogeneity in other household finance responses to payouts along the wealth distribution. The wealthiest survivors tend to save their payouts, spend down slowly, and experience little change in their bequest plans. The least wealthy, on the other hand, experience enhanced bequest motives for a short period before quickly spending their payouts. In the long run, these individuals even end up more likely to be receiving government support than widow(er)s without life insurance payouts.