This is an industry that does not disclose fundamental information that consumers should know” (Keating 1). This analysis will relate life insurance expenditures as they relate to consumption economics. It will also explore the permanent insurance policies, ones that build cash value over the life of the policy and pay dividends. A conclusion will address the future of purchasing life insurance as an investment.
When it comes to consumption economics, there are two main theories which provide an explanation for the long-term behavior of consumption by consumers. The theories are not competitive, but, instead, accentuate one another. These two theories are the permanent income hypothesis and the life-cycle hypothesis. The permanent income hypothesis was originated by Milton Friedman in the 1950s, and it theorizes that individuals fix their consumption rates based on their permanent or long-term income and not their present level of income. Even though income levels fluctuate this has little impact on consumption behavior. This is because consumers “will save when income is temporarily high, and use this saving to support consumption when income is temporarily low. Thus overall consumption will be generally constant. This is because of diminishing marginal utility of consuming plenty in one time period, whereas by distributing so as to equate consumption over two time periods, the overall utility will be greater”