Life Insurance Demand under Ambiguous Mortality Risk

We study life insurance demand for a risk- and ambiguity-averse policyholder who is ambiguous about her mortality risk. We show that, under certain conditions, ambiguity aversion increases the demand for life insurance. We also indicate that the policyholder’s ambiguity aversion may have the counterintuitive effect of reducing the optimal life insurance demand. We evaluate the robustness of our results by considering several alternative models of ambiguity aversion. Our findings reveal how ambiguity about mortality risk can explain the over (under) insurance puzzles.