Uncertain Bequest Needs and Long-Term Insurance Contracts
AbstractWe examine how long-term life insurance contracts can be designed to incorporate uncertain future bequest needs. An individual who buys a life insurance contract early in life is often uncertain about the future financial needs of his or her family, in the event of an untimely death. Ideally, the individual would like to insure the risk of having high future bequest needs; but since bequest motives are typically unverifiable, a contract directly insuring these needs is not feasible. We derive two equivalent long-term life insurance contracts that are incentive compatible and achieve a higher welfare level than the naïve strategy of delaying the purchase of insurance until after one’s bequest needs are known. We also examine the welfare effects of such contracts and we show how third-party financial products, although beneficial to the individual in the short run, can be welfare decreasing over one’s lifetime.
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Bibliographic InfoPaper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2505.
Date of creation: 2008
Date of revision:
asymmetric information; bequest needs; life insurance;
Other versions of this item:
- Wenan Fei & Claude Fluet & Harris Schlesinger, 2007. "Uncertain Bequest Needs and Long-Term Insurance Contracts," Cahiers de recherche, CIRPEE 0742, CIRPEE.
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- D91 - Microeconomics - - Intertemporal Choice - - - Intertemporal Household Choice; Life Cycle Models and Saving
- G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
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