Cross-sectional analysis shows negative relationships between life insurance and liquidity in taxable estates, suggesting funding needs through insurance.
This study uses cross-sectional regression analysis to examine the relation between life insurance coverage and liquidity for individuals who anticipate having taxable estates. The results indicate that there is a negative relation between the amount of life insurance an individual owns and the amount of liquidity (exclusive of the life insurance) in the anticipated estate. This finding supports the hypothesis that individuals who anticipate having taxable estates, but lack the liquid assets to pay the estate taxes, will fund this need with life insurance. This study also finds a negative relation between the amount of life insurance owned by an individual and the individual's ability to defer the payment of estate taxes. Finally, the results show that individuals carry more life insurance than necessary to pay estate taxes, administration expenses, and debts.
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Terry L. Crain (1994) studied this question.
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