Moral Hazards in Life Insurance: The Suicide Exclusion October 8, 2007Posted by federalist in Finance, Healthcare, Human Markets, Open Questions.
I was surprised to discover that life insurance policies cover suicide after a two-year “exclusion” period. (I.e., after two years of paying premiums an insured can kill himself and the insurance company will pay out the full benefit.) I was even more surprised to discover that nobody writes life insurance with a total suicide exclusion. A few observations:
- Obviously the fact that life insurance covers suicide creates a tremendous moral hazard. People with active life insurance have a financial incentive to commit suicide! There is ample evidence that this incentive has a real effect, as detailed in Samuel Hsin-yu Tseng’s paper, “The Effect of Life Insurance Policy Provisions on Suicide Rates.”
- As far as I can tell, the exclusion period stems from a majority of state regulations. Life insurance is regulated at the state level, and (as of 2005, ibid. page 4) 36 states require life insurers to cover suicide after no more than two years of the policy being active.
- As a consumer I would like to be able to buy insurance contracts that don’t pay a suicide benefit. Such policies would be substantially cheaper.
- The irony: Our government forbids anyone from being compensated for donating organs to save the lives of others (supposedly because of the moral hazard of such an incentive), yet it requires insurers to create an incentive to commit suicide!