Why do rich people buy life insurance

Historically, life insurance has been purchased to replace the lost income of the deceased. However, economic research and modeling of life insurance purchase decisions based on this idea have resulted in outcomes that question the validity of this assumption. One of these outcomes is that men do not seem to buy more life insurance when they are married. The other outcome is that high wealth households buy too much life insurance while low wealth households buy too little life insurance to maintain the family standard of living. The difference between married and single individuals and between high and low wealth individuals are highlighted in the estate tax. Low wealth individuals are not subject to the estate tax while high wealth individuals are subject to the estate tax. However, transfers of wealth to a spouse and the death benefits of life insurance (under certain conditions) are exempt from the estate tax. Empirical evidence suggests that high wealth individuals may be using life insurance for estate planning purposes and the inclusion of these tax treatments is essential to understanding the life insurance purchase decision. The impact of the estate tax on individual decisions regarding asset accumulation is modeled to quantify the policy implications of changes to the estate tax. These ideas of life insurance and the estate tax are extended to address their impact on entrepreneurship.