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Annuity and insurance choice under habit formation

Author

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  • Boyle, Phelim
  • Tan, Ken Seng
  • Wei, Pengyu
  • Zhuang, Sheng Chao

Abstract

This paper examines the impact of habit formation on the demand for life-contingent contracts in a life-cycle model. We derive an analytical solution for the optimal consumption, portfolio choice, and life insurance/annuity purchases. We illustrate the mechanism by which the consumption habit assumption can alter the bequest motive and therefore drive the demand for life-contingent products. Based on our assumed insurance/annuity markets, we show that habit formation alone leads to low demand on either life insurance or annuity but not both. However, habit formation together with social security results in low demand in both life insurance and annuity.

Suggested Citation

  • Boyle, Phelim & Tan, Ken Seng & Wei, Pengyu & Zhuang, Sheng Chao, 2022. "Annuity and insurance choice under habit formation," Insurance: Mathematics and Economics, Elsevier, vol. 105(C), pages 211-237.
    • Handle: RePEc:eee:insuma:v:105:y:2022:i:c:p:211-237
    DOI: 10.1016/j.insmatheco.2022.04.003
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    Cited by:

    1. Li, Xun & Yu, Xiang & Zhang, Qinyi, 2023. "Optimal consumption and life insurance under shortfall aversion and a drawdown constraint," Insurance: Mathematics and Economics, Elsevier, vol. 108(C), pages 25-45.

    More about this item

    Keywords

    Habit formation; Life-cycle model; Life insurance; Annuity; Martingale method;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G52 - Financial Economics - - Household Finance - - - Insurance

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