Factor Affecting Individual Investing in Life Insurance in Malaysia

Abstract
People invest in life insurance to protect themselves and their
dependants from income related uncertainties at their retirement age or
in the event of death. This research aims at identifying the key factors
influencing the individuals’ decision to invest in life insurance
among the Malaysian population. The study suggests that economic
fluctuations have significant influence on other categories of life
insurance and minimal influence on life insurance. From the review of
literature, the study suggests that many people in Malaysia have
insurance cover of other categories other that the life insurance. Based
on this observation, the study purposes to identify the interaction
between independent variables that influence the decision of the people
of Malaysia to invest in life insurance. The key factors identified
through the review of literature include the marital status, education,
age, and employment status. The study postulates that the four
independent variables have positive and significant influence on the
individuals’ decision to invest in life insurance.
Key words: Life insurance, dependants, influence, insurance policy,
premiums.
Chapter 1
1.1 Introduction:
This chapter focuses on describing the background of the study, research
objective, research questions, and hypothesis.
1.2 Background of the study:
In one of its reports, the Financial Consumer Agency of Canada defines
insurance as a means of relegating potential financial risks that result
from unanticipated events such as illness, damage to property or theft
in the future (FCAC, 2011). Similarly, Cowley & Cummins (2005, p.
194-206) defined life insurance as a contractual agreement in which the
insurer (insurance company) undertakes to pay the insured (client) a
fixed sum of money upon death or expiry of the agreed period whichever
happens earlier. The term life assurance is alternatively used by life
insurance because payment of the life insurance policy is certainly
unlike most of other insurance policies, whose payment expires if the
insured risk fails to occur within a given period. According to Loke &
Goh (2012, p. 415-419) life insurance policy was designed to guard
against loss of income by compensating the policyholders as per the
terms of insurance contract.
The uncertainties and complexities surrounding business and life have
made insurance cover a necessity. According to Kumar (2012, p. 1)
Insurance reduces the fear of loss of revenue in business in the event
of property destruction or event of occurrence of other events such as
theft. In addition, insurance protects the loss of income during the
retirement or after death of the heads of the family, thus reducing the
fear of unknown in business and among individuals (Kumar, 2012, p. 1).
To this end, the business management has a duty to carefully plan for
the most suitable insurance package that will ensure the going concern
of the business irrespective of the potential risks. For an instant, the
liability coverage protects the business from financial loss if a third
party is injured by its products. In addition, the individual insurance
coverage protects the insured from sudden loss of income or unexpected
demand for large expenditure following the occurrence of a given risk.
In addition, the insurance coverage reduces the duration of recovery
from an insured risk for both individual and business enterprises.
Moreover, the insurer may replace the lost income, refurbish the
destroyed property, or cover the cost of lawsuits (Loke & Goh, 2012, p.
415-419).
The advantages of insurance are providing security against sudden loss.
Celik & Kayali (2009, p. 32-37) suggested that insurance cover is an
effective tool to bridge the gap between remains in business and
bankruptcy in the event of an unexpected risk. This is accomplished by
restoring the business enterprise or an individual to the original
position they were before the risk occurrence. Some of the business
risks that may result in termination of business in the absence of
insurance cover include sea storms and fire outbreaks. In addition, life
insurance provides an effective income security for families, which
protects the family members from sudden loss of a source of revenue
follow the premature death of the breadwinner (MARC, 2012, p. 1-6).
Insurance gives security to both individual and businessman. The recent
developments in the insurance industry have resulted in a convenient
insurance cover including the social welfare schemes. Some of the modern
schemes include cover against sickness, unemployment, accident, health,
and old age insurance cover. Kumar (2012, p. 1) Asserted that the
convenience of the schemes assists the poor in establishing social
justice.
Besides that, another advantage is spreading of risk. Insurance
companies help in the creation of finance pools, from which the
compensation amounts are obtained in the event the insured risk occurs.
The finance pools are created by the premiums that are paid to the
insurance companies for a specified period by individuals and business
enterprises that hedge by taking insurance covers. However, the main
significance of the insurance cover is the transfer of risk from an
individual or business to the insurer who buffers the insured from a
common fund (Kumar, 2012, p. 1). Risk adjustment and age rating are the
two main approaches, which are currently used by insurers to spread risk
in life insurance. Risk adjustment applies to the policy holders whose
premiums are paid by third parties including the government and
employees. Age rating, on the other hand, applies to individual health
policy holders and the premiums are charged depending on their current
age and health status (Sharku, Leka & Barjrami, 2011, p. 134-137). The
two approaches assist the insurers in spreading the risk of death across
individuals of different age, income, and health status.
One of the most significant advantages would be insurance encourages
savings. Insurance companies collect funds from individuals and business
enterprises of varying categories, thus forming a pool of savings. In
this respect, the insurance policies provide a mode of investment to the
premium payers (Kumar, 2012, p. 1). However, the category of investment
provided by the insurance policy targets at providing income security at
old age, expiry of a fixed time, or death of the insured, upon which the
insured amount is paid to the insured or the nominee. The insured amount
can be paid in lump-sum or regular payments depending on the terms of
the policy. In addition, the convenience of insurance policies offers a
suitable retirement plan because the insured can be paid the insured
amount at regular periods during the retirement phase (Sharku, Leka &
Barjrami, 2011, p. 134-137). Other saving and investment benefits
provided the insurance policies include the annual announcement of
dividend or bonus, which is a riskless investment option. The
policyholder can also take an investment loan against the policy, which
can help in catering for the unplanned expenses without affecting the
status of the policy.
Although the insurance coverage has a lot of benefit to individuals and
business enterprises, it rarely comes cheap. According to Sharku, Leka &
Barjrami (2011, p. 134-137) the high cost of insurance policies, in
terms of premiums, is the main drawback for individuals and business to
hedge against disasters. This mainly affects small business owners and
individuals who seldom have sufficient income to devote to hedge against
the unforeseen hazards. Health and life assurance are some of the
policies that are affected by the high cost of maintenance. Currently,
there are high-deductible insurance plans, which in essence are not
commiserating with the risk they purport to hedge. The old members of
society and individuals suffering from permanent illnesses are charging
higher premiums because of the perceived risk of death. This may
discourage the affected population from undertaking the insurance cover
and opt to invest their money in alternative projects that can yield
income in the short-run (Cordell & Langdon, 2009, p. 1-2).
Meeting fraudulent insurance agents is an emerging challenge in the
insurance industry. Many insurance agents have been licensed to sell the
insurance policies. The larger number of agents has raised the
probability of meting scrupulous representatives of different insurance
companies. There are several instances in which insurance agents have
reported and sued for malpractices. Insurance agents have perceived
opportunities to practice fraud by overcharging the clients for
different insurance policies. In the case of Ronald Broun, an
independent insurance agent admitted a fraud scheme of $ 12.6 million
that covered over 25 residential properties (Loke & Goh, 2012, p.
415-419). This implies that the insurance agents can overcharge
ignorant clients for personal financial gains. In addition, there is a
wide variety of insurance policies that have emerged with the rapid
development in the insurance industry, some of which may be difficult to
comprehend (Loke & Goh, 2012, p. 415-419). Insurance agents may
misguide the clients about a wide variety of insurance policies offered
by their employer companies.
The most popular insurance product is life insurance. Under life
insurance, an insurance company and individual enter into a contractual
agreement, in which the insurer agrees to hedge the income of the
insured from the risk of death or disability. The contract specifies the
amount that the insurance company should pay the insured person of
beneficiaries in the event the insured hedged risk occurs. The insured,
on the other hand, agrees to pay a specified amount (premiums) to the
insurance company at specified periods (PolicyBazaar, 2012, p. 46-76).
Life insurance plays a crucial role in individual and family lives
because it protects them from loss of income in the event the income
earner dies. Division of Family Health Development and Ministry of
Health Malaysia reveals that although mortality rates in Malaysia have
declined since 1950’s, the risk of death among the Malaysian people
aged 25-64 is still high (that is 5.4% for male and 4.1% for female)
(Ministry of Health Malaysia, 2012, p. 1). The risk of death of a family
head can bring serious financial challenges on the surviving dependants
especially if the family heads leave financial obligation such as
schooling children, and mortgage. Consequently, life insurance provides
an opportunity share the risk of premature death of the income earner
with others who are insured the same insurance company (Garman & Forgue,
2006). Besides that, some individuals purchase life insurance policies
as a means of saving for the future and a form of investment.
The insurance sector in Malaysia has reported momentous progress in the
last few decades. Significant improvements in the insurance market’s
operational and financial management have been observed, and trends
indicate that consumer perception towards this sector in Malaysia has
become more positive (Bank Negara, 2000, p. 1). The Malaysian insurance
industry did not experience the direct effects of the world economic
crisis of 2008. However, the domestic slowdown in economic development
reduced the growth rate of the insurance sector to 5.7 % in 2009 from
the growth rate of 8.5 % in 2008 (MARC, 2012, p. 1-12). The growing
trend in support of the life insurance segment of the middle-income
population coupled with the current healthy consumer spending gave the
industry a rapid recovery and penetration rate in 2010 and 2011 as shown
in Figure 1.
Figure 1: Insurance penetration rate in Malaysia
Source: MARC, (2012, p. 1-12)
According the MARC (2012, p. 1-12) projections, the penetration rate
of insurance companies in Malaysia may grow by 20 % in 2014 and 75 % by
2020 as a result of the effective government policies (such as
safeguarding savings and protection of low income household segment) and
appreciation of the industry by the general public.
Even though, the industry has grown the insurance sector in Malaysia
remains a small market as compared to many developing countries and a
significant portion of the Malaysian population is not investing money
in insurance (Bank Negara, 2000, p. 1). Currently, the life insurance
policies in Malaysia accounts for about 51.3 % of the total sale in the
insurance industry. The high share of the life assurance policy results
from the large number of the companies selling the life insurance cover
in Malaysia compared to other categories of policies. The registered
life assurance companies in Malaysia include the Great Eastern Life,
AIA, ING Malaysia, MAA, MNI, Mayban Life, Hong Leong, Asia Life, MCIS
Zurich, Manulife, Allianz Life, and AmAssurance among others (Chean,
2010, p. 1).
Currently, there are many branches of life insurance policies in
Malaysia depending on individual life insurance companies. However,
Rosly (2012, p. 1) Categorizes life insurance in term life insurance and
whole life insurance. Term life insurance is a non-permanent policy
which covers the insured against the risk of death within a given
period. The insured amount is only paid to the insured if they encounter
critical illness within the term of insurance or to beneficiaries if
they died within that period (Cordell & Langdon, 2009, p. 1-2). The
benefits attached to this type of policy include lower premiums and
flexibility of application. However, Prabhakara (2010, p. 46-76)
identified that although the cost of a term life insurance policy has
decreased by 50 % in the last ten years, in Malaysia, the current cost
of still high for the majority of the Malaysian population to afford.
The whole life insurance policy offers protection against the risk of
death, disability, and critical illness. The whole life insurance policy
is much more flexible and has more benefits than the term life insurance
policy. Some of the notable benefits include the income tax relief,
higher premiums, permanent tenure insurance, and its usage as a
retirement fund (Rosly, 2012, p. 1). There are three main categories of
whole life insurance policies offered in Malaysia depending on the
combination of benefits attached to each. These policies include the
investment-linked insurance, which combines the investment and
protection benefits, endowment insurance, which combines the savings and
protection benefits and life annuity plan, which combines investment
and savings benefits (Rosly, 2012, p. 1). In addition, the Malaysian
life insurance companies offer a Takaful, a life insurance policy which
is based on the Islamic law known as Shariah.
1.3 Research objectives:
This identifies the key factors influencing the individuals for
investing money in life insurance, in Malaysia. The review of the
current body of the literature reveals a variety of independent
variables that influence the individuals’ decision to invest in life
insurance. The objective of this research is to assess the effects of
these factors among the Malaysian population. The objective can be
subdivided into the following categories
To identify the key factors (independent variables) influencing the
client decides to invest in life insurance among the Malaysian
population.
To establish the relationship between the independent variable
(including marital status, education, age, and employment status) and
the Malaysians’ decision to invest their money in life insurance.
To determine the interaction between the Malaysians’ decision to
invest their money in life insurance and the identified independent
variables.
1.4 Research questions:
There are three research questions designed to achieve the objectives of
the current research. The research questions include
What are the key factors affecting the client`s decision to invest money
in their life insurance among the Malaysian population?
What form of relationship exists between the independent variables and
the individuals’ decision to invest in life insurance among the
Malaysian population?
Does the interaction between the individuals’ decision to invest in
life insurance and the independent variables identified in the current
research exist?
What form of relationship exists between the independent variables and
individuals’ decision to invest in life insurance?
1.5 Problem statement:
This research purposes to determine the factors that influence the
Malaysian decision in purchasing life personal life insurance policies.
The research provides a deeper understanding of the factor affecting
individual investing in life insurance, in Malaysia. According to MARC
(2012, p. 1-12) the general insurance industry has experienced a slow
growth rate (as shown in Figure 2 below) after the economic slowdown of
2009 to date compared life insurance (figure 1 above).
Figure 2: Trend in general insurance industry in Malaysia
Source: MARC, (2012, p. 1-12)
Figure 3: Purchases of life Insurance Policy
Source: Bank Negara Malaysia, (2009)
Figure 2 shows that the penetration in the general insurance industry
was directly affected by the economic slowdown of 2009, but it did not
significantly affect the Malaysian decision to purchase life insurance.
The penetration of life insurance packages in Malaysia continued to rise
in 2010 as shown Figure 3. Looking at the trend, what could be the
underlying factors that persuade the Malaysian to invest in life
insurance despite the economic slowdown? Although the life insurance
package registered a high penetration rate compared to other segments,
the Malaysian penetration rate was much lower compared to the developed
markets (including Japan, India, Korea, Singapore, and Taiwan) with a
penetration rate of about 80 % (MARC, 2012, p. 1-12). By critically
looking at this phenomenon, one may ask what are the factors influencing
the Malaysian decision to purchase life insurance and not affecting the
citizens of other countries in the region? The current research seeks to
answer these questions by determining the factors that influence the
decision of the Malaysian in investing in the life insurance. The
research will provide a clear understanding of the causes of relatively
low penetration of the Malaysian market despite the rising household
incomes and high savings following the reduced challenges of economic
slowdown (Bank Negara Malaysia, 2009).
1.6 Significance of research:
The conclusions to be drawn from this research could help insurance
companies in Malaysia to understand the individual’s acceptance.
Additionally it will in identification of the preferences regarding
insurance products and services which could help them develop better
offerings and improve their performance further. Besides that, it is a
chance to let know all the insurance company about the interest of
Malaysian people in life insurance packages. This will help people
appreciate the significance of life insurance and lure them to purchase
the policies. In addition, the research will help in the elimination of
the misconception that life insurance is a means of revenue generation
for the life insurance companies. This research is to find out the
factor affecting individual investing in life insurance, in Malaysia.
Secondly, the current research will help the government in making
informed policy regarding the insurance industry and especially the life
insurance packages. For an instant, the government of Malaysia aims at
increasing the penetration rate of life insurance by 2.8 % on the
current penetration and 75 % increase in the number of policies over
population by 2020 (MARC, 2012, 1-12). However, these goals cannot be
achieved by formulation of public policies. The government needs to know
the different factors that influence the citizens in purchasing life
insurance in order to match the policies with public demand and
individual preferences. The current research seeks to provide this
information and recommendations that will help the government agencies
in formulating policies that will satisfy both the government goals and
the desires of the Malaysian regarding life insurance.
Finally, the study will add onto the existing body of knowledge by
providing the up-to-date perception of the members of public about life
insurance policies. This is important to the scholars who wish to pursue
insurance as their future career. In addition, the research will act as
a reference to researchers and scholars who wish to conduct further
studies in different aspects of the insurance industry.
Summary:
The current study aims at identifying the relationship between the
demographic factors and individuals’ decision to invest in life
insurance in Malaysia. Trends show that the investment in life insurance
in Malaysia has been increasing relative to the general insurance
market. This occurs despite the economic slowdown in Malaysia. In
addition, the successful completion of current leads to the
establishment of the interaction between demographic factors and the
decision to invest in life insurance among the Malaysian population.
Chapter 2
Literature Review
2.0. Introduction
This chapter provides a discussion of the independent variables that
influence the investment in life insurance. Some of these variables,
which were identified through the literature review, include age of an
individual, employment status, marital status, and education.
2.1 Literature Review
A life insurance is a plan which combines investment and protection. In
exchange for premiums, the insurer gives death benefits in the form of
lump-sum to the beneficiaries of the insured when the insured dies
(Fidelity, 2013, p. 1). Individuals select the type of life insurance
based on their needs and goals. In the common practice, the term life
insurance policy offers protection over a given period while permanent
insurance, protects the insured for life. Depending on the government
policy, the insured amounts are tax-free (Fidelity, 2013, p. 1).
The assumption that periodic payment of premiums is expensive and
disrupts the budget hinders many people from investing in life
insurance. According to Cary (2012, p. 1) some people imagine that life
insurance premiums are higher than what they can afford from their
income. However, the study shows that insurance companies have developed
a wide variety of insurance policies to accommodate income earners at
all levels. Individuals who cannot afford whole life insurance policies
can purchase term life insurance policies with lesser premiums (Cary,
2012, p. 1). Under the term life insurance, the insured is protected
during a given period. Beneficiaries are given the insured amount if the
risk of death occurs within the period in which the policy is still in
force. However, the term life insurance policy has been sub-divided into
another term sub-policies (such as renewable term and level premium
term) to suit the demands of the clients (Chean, 2010, p. 1).
The whole life insurance, on the other hand, provides protection to the
insured over their lifetime in exchange for payment of a given amount of
premium. The insured amount can be paid in case of disabilities or to
their beneficiaries upon the death of the insured. The whole life
insurance policy provides a guarantee of payment of the insured amount,
under the agreed terms and conditions (Cordell & Langdon, 2009, p. 1-2).
This gives it the capacity of a reliable investment opportunity to
provide income during the retirement to the insured or their
beneficiaries. However, there are several factors that may affect the
assurance of getting the insured amount. These factors include the
mortality rate of the individuals insured by a given company, expenses,
and performance of the project in which the insured amount was invested
(Haolenlal & Gangte, 2013).
Universal life insurance is a unique permanent life insurance, in which
the amount of premiums paid in excess of the current cost of insurance
is credited to the cash value (Lise & Lange, 2010, p. 1-11). This is a
common practice especially in the United States where the cash value is
credited together with interests in each month while the policy is
debited with the cost of insurance policy and other charges (Lise &
Lange, 2010, p. 1-11). The amount credited every month is left to the
discretion of the insurer, but should be within the limits specified in
the laws regulating the insurance industry. Universal life insurance has
several applications including the final expenses (such as burial and
unpaid medical bills), income replacement for the left spouses, debt
coverage, state replacement, and key person insurance among others (Lise
& Lange, 2010, p. 1-11). The universal life insurance policy is
considered to be more flexible than whole life insurance policy because
it provides the permanent protection as well as accumulation of cash
value for emergency and other needs.
In this study, factor affecting individual investing in insurance, in
Malaysia, there will be four factors used. The factors are age,
education, employment and marital status.
2.1.1 Age of an individual:
A research study conducted on factors affecting customers’ investment
towards life insurance policies found that the age of the customer is
one of the crucial factors affecting the consumer life insurance
purchase decision making (Yadav & Tiwari, 2012). According to the study
by Yazid, Ariffin & Hussin (2012) as age increases, household heads
become aware of the need of life insurance due to increased earning
power and a greater number of dependents that result in increased life
insurance need to protect against financial loss following the death of
household heads. Praveen Kumar Tripathi (2008) conducted a research on
consumer buying behavior in insurance markets and found that insurance
needs, satisfaction levels, and age are crucial predictors of consumer
perception and expectations.
In some literature, the findings showed that age is positively related
to life insurance demand. This is because an increase in age indicates a
higher positive attitude toward insurance and people who are towards the
end of an active life are more conscious of life after retirement
(Yazid, Ariffin & Hussin, 2012). Beyond a certain age, however, the
needs of life insurance declines as children grow up and become self
supporting and the household accumulates wealth that can be used to
support the level of living of the family.
Evidence supports that age was found to have a negative impact on life
insurance demand. This can be explained as people are more likely to
purchase life insurance for morbidity as well as for retirement
purposes. This varies with their affordability and not age as the
average age of people increased the cost of obtaining coverage also
increased (Dash & Soon J., 2013, p. 36-55). Following the previous
studies, the current study hypothesis that
H0: There is no positive and statistically significant relationship
between the age of an individual and the need for investment in life
insurance.
H1: There is a positive and statistically significant relationship
between the age of an individual and the need for investment in life
insurance.
2.1.2 Employment status:
The relationship between employment status and the life insurance demand
has been studied in the past studies by Skinner & Dubinsky, (1984),
where the variables also include the labor force participation (Gandolfi
& Miners, 1996), and the occupation (Duker, 1969). Employment status
is a good predictor that influences the purchasing decision. It elevates
the life insurance demand and the employment status of an individual
also influence the life insurance purchasing decision.
Evidence has shown that both full and part time work has a positive
impact on group life insurance ownership (Gandolfi & Miners, 1996). The
purchasing of the face amounts of life insurance is influenced
positively by a wife’s working status (Ferber & Lee, 1996) a wife’s
employment status is a crucial factor in a family decision to purchase
life insurance (Skinner & Dubinsky, 1984). A household head’s
occupation was determined to be significant except for the middle and
high income subgroups and those who started with a new job were more
likely to purchase life insurance. The employment status is positively
related to life insurance demand because the higher status of people
represents the people who are future oriented, more financially
sophisticated and more concerning in educating their children, which
accounted for a greater awareness of the need for life insurance
(Duker, 1969). Following the previous studies, the current study
hypothesis that
H0: There is no positive and statistically significant relationship
between employment status and demand for life insurance.
H1: There is a positive and statistically significant relationship
between employment status and demand for life insurance.
2.1.3. Marital status
Hong & Rio-Rull (2006, p. 1-28) conducted a research to determine the
relationship between the reference life insurance and family structure,
with a focus on marital status and the number of children an individual
has. The research identified that individuals with dependents have a
motive of leaving their loved ones with some amount of resources to send
in case they die. In addition, the researcher established the expected
utility of dependents to consume resources while in the household of the
source. The researcher concluded that the utility of life insurance
increases with marital status for both married women and men. This was
consistent with a study conducted by Dash & Sood (2013, p. 36-55) which
concluded that insurance companies find the difficulty of marketing the
life insurance package as an alternative to the pension plan, but easier
to sell as a means of hedging the income of beneficiaries. However,
study differentiated the utility among men and women by stating that
women are marriage elevates the marginal utility of life insurance
consumption among the married women than men. This implies that married
couples compensate the loss of survival’s benefits by purchasing a
large life insurance cover. However, the study was limited in scope
because it could not explicitly establish the differences in the
performance of single consumers and married men. This would have paved
way into further investigation of the consumption of life insurance
among the educated couples and other relevant assortments (Hong &
Rio-Rull, 2006, p. 1-28).
Min (2008, p. 3-77) identified that marital status has a strong effect
on both the household and individual life insurance. The study
identified that the unmarried individuals prefer term life insurance
compared to the married couples who purchase a whole life insurance
package. This implies that the married couples focus on the welfare of
their dependants if they die and leave them. However, Dash, & Sood
(2013, p. 36-55) suggested that although the married couple expresses
much concern about the income security of their dependants, they often
face the financial challenge, which limits their capacity to pay
premiums. These results from the increase in the household expenditure
compared to the individual expenses. The study further identified that
77.54 % of term-life insurance holders, 65.38 of cash value of life
insurance holder were the married household (Min, 2008, p. 3-77).
However, the research could not establish the relationship between the
education level of the couples, number of dependents or children,
employment status of couples with the demand for life insurance among
the married couples. Following the previous studies, the current study
hypothesis that
H0: There is no positive and statistically significant relationship
between marital status of individuals and demand for life insurance.
H1: There is a positive and statistically significant relationship
between marital status of individuals and demand for life insurance.
2.1.4. Education
Different researchers have identified varying relationships between the
level of education and the demand for life insurance. According to the
research conducted by Loke & Goh (2012, p. 415-419) the rapid growth of
the insurance industry is a product of the educational progress among
the members of the society. The research suggested that the advancement
in education enhances the understanding of the importance of insurance.
The same researchers attributed the increase in the level of literacy to
the increase in insurance expenditure, in Malaysia by 12 % in 2010. In
addition, the research established at the interaction between the demand
for life insurance and demographic factors such number of dependents,
occupation, and age of the head of the household, ethnicity, and risk
aversion. However, Loke & Goh (2012, p. 415-419) identified that
individual with tertiary level of education is more interested in wealth
management and creation of additional wealth than purchasing life
insurance. The research further identified that 70 % of the Malaysian
with tertiary education prefer non-life insurance to life insurance.
A study conducted by Celik & Kayali (2009, p. 32-37) identified
education, number of children, and the level of income as the key
demographic factors that influence the individual’s decision to
purchase the life insurance package. The study identified a positive
correlation between the level of education and the demand for life
insurance in both the United States and Mexico. The at a higher level of
education, people are aware of life insurance and the potential risks
that their dependents may encounter if they die and leave them without
income security. The educated members of society utilize the available
insurance packages to protect themselves and their dependents against
the future income uncertainties. The findings of this research ware
similar to the findings of the research conducted by Beck & Webb (2003,
p. 52-79) indicated a positive correlation between the need to purchase
a life insurance policy and the level of education. This is because
increased access to long-term savings and insurance enhance to higher
education. In addition, the research identified that the demographic
determinants of the demand for life insurance (including the level of
income, education, and marital status) are highly correlated to one
another.
H0: There is no positive and statistically significant relationship
between level of education of individuals and demand for life insurance.
H1: There is a positive and statistically significant relationship
between level of education of individuals and demand for life insurance.
2.2. Theoretical framework
Researcher in the field of insurance has developed different theories to
explain the underlying factors that influence the individual`s decision
to invest in life insurance. The permanent income theory states that the
consumption patterns of individuals are determined more by their
long-term income expectations than their current income (Dash & Sood,
2013, p. 36-55). This implies that, in addition to the demographic
determinants, of the necessity for life insurance, people have a
positive perception about the investment nature of life insurance.
Moreover, the theory establishes the relationship between employment and
the level education with an increase in the demand for life insurance.
According to Beck & Webb (2003, p. 52-79) suggested that the newly
employed youths earn less because of their limited experience at work
and their level of education. However, as their level of experience and
educational experience rashes, they earn more and invest more in the
life insurance packages to safeguard themselves and their dependents
against the reduced flow of income in their old age (assuming a constant
pattern of income consumption).
Moreover, the theory takes into consideration the age factor as a
determinant of the need for investment in life insurance by assuming
that the individuals’ consumption declines gradually as they age-up,
but the cash inflow is expected to reduce substantially as they approach
the retirement age and near negligible after retirement (Beck & Webb,
2003, p. 52-79). The theory asserts that people borrow from the future
and save their income before retirement in order to stabilize the level
of consumption throughout their lifetime. The life insurance benefits
are among the best guards against significant variations in the
household consumption patterns. The assumptions of this theory are
consistent with the provisions of the “life insurance purchasing
decision approach”, which states that people increase their future
utility by investing in life insurance (Dash & Sood, 2013, p. 36-55).
The approach integrates the financial needs analysis, which helps in the
determination of the needs of the beneficiaries in the event the bread
winner of the family dies. The approach suggests a positive correlation
between the individuals’ decision to invest in life insurance and
their marital status. Loke & Goh (2012, p. 415-419) added that the
surviving couples are left with a relatively constant consumption rate
because they need income to pay for education fees, care for children,
and mortgage among other needs. The two theories establish positive
correlation between the individuals’ decision to invest in life
insurance and demographic factors, which include age, employment,
marital status, and education.
The current study identified four demographic factors (including age,
employment, education, and marital status) that influence the
individual’s decision to invest in life insurance. In addition, the
study established a positive correlation between the four factors and
the demand for life insurance with a few exemptions. Some of the
theories that support the current study include the permanent income
theory and the “life insurance purchasing decision approach”.
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