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The Effect of the Real Option to Transfer on the Value of Guaranteed Minimum Death Benefits

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  • Eric R. Ulm
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    Abstract

    Variable annuity contracts frequently have many options and option-like features embedded in the contracts. Some are obvious, such as guaranteed minimum death benefits (GMDBs), while others are less obviously option-like. In this article, we consider the effect of the real option to transfer funds between fixed and variable accounts. If a GMDB rider is considered in isolation, it is sometimes in the policyholder's interest to transfer to the fixed fund if the fixed fund earns less than the variable fund in a risk-neutral world. On the other hand, the option to transfer will not be used if the entire annuity and rider are considered together. Copyright The Journal of Risk and Insurance, 2006.

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    File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1539-6975.2006.00165.x
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    Bibliographic Info

    Article provided by The American Risk and Insurance Association in its journal The Journal of Risk and Insurance.

    Volume (Year): 73 (2006)
    Issue (Month): 1 ()
    Pages: 43-69

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    Handle: RePEc:bla:jrinsu:v:73:y:2006:i:1:p:43-69

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    Cited by:
    1. Gao, Jin & Ulm, Eric R., 2012. "Optimal consumption and allocation in variable annuities with Guaranteed Minimum Death Benefits," Insurance: Mathematics and Economics, Elsevier, vol. 51(3), pages 586-598.
    2. Gerber, Hans U. & Shiu, Elias S.W. & Yang, Hailiang, 2012. "Valuing equity-linked death benefits and other contingent options: A discounted density approach," Insurance: Mathematics and Economics, Elsevier, vol. 51(1), pages 73-92.

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