Savings motives and the effectiveness of tax incentives - an analysis based on the demand for life insurance in Germany

Sommer, Mathias

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URN: urn:nbn:de:bsz:180-madoc-15618
Document Type: Working paper
Year of publication: 2007
The title of a journal, publication series: MEA Discussion Papers
Volume: 125
Place of publication: Mannheim
Publication language: English
Institution: School of Law and Economics > Sonstige - Fakultät für Rechtswissenschaft und Volkswirtschaftslehre
MADOC publication series: Veröffentlichungen des MEA (Mannheim Research Institute For the Economics of Aging) > MEA Discussion Papers
Subject: 300 Social sciences, sociology, anthropology
Subject headings (SWD): Steuervergünstigung , Sparen <Motiv> , Lebensversicherung , Erbe , Deutschland
Keywords (English): tax incentives , savings motives , bequests , life insurance
Abstract: We exploit on German households' savings in life insurance products, the characteristics of life insurance products and the specific tax treatment of savings in life insurance products to assess the importance of different savings motives and the effectiveness of tax incentives. Our insights about the determinants of the demand for life insurance products also allow a broad assessment of the possible consequences from the recent reforms of the pension system and of the tax treatment of life insurance policies. Socioeconomic and institutional factors generate substantial variation within the population and over time, e.g. in the replacement rates of the public pension system and the household tax rates, which allows us to disentangle savings motives and the effect of tax incentives from other factors. We employ a number of indicators for the different savings motives. Further, based on the specifics on the German tax law and the richness of our data we are able to generate a unique measure of possible tax savings in life insurance products. We find support for our hypothesis that savings in life insurance products may substitute for a low replacement rate in the public pension system. Only high income households who face lower replacement rates from the public pension system do not increase their demand for life insurance products. Further, we use several measures for a possible bequest or family insurance motive. Our evidence on the relevance of such savings motives is mixed like the existing literature. The presence of a family increases the demand for term life insurance but households wiht children do not accumulate higher levels of life insurance wealth. Further, some income inequality within a couple increases the likelihood to save the life insurance. The effects are not increasing in the degree of income inequality though and only partly significant. Finally, we find households with high tax rates to be more likely to invest in life insurance products, indicating that the tax free interest earnings from a long term insurance contract play a strong role in households' choice to invest in life insurance. The possibility to deduct contributions from taxable income turns out to be no incentive to save in life insurance products.
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