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Uncertain Bequest Needs and Long-Term Insurance Contracts

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Author Info
Wenan Fei ()
Claude Fluet ()
Harris Schlesinger ()

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Abstract

We 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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Publisher Info
Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number CESifo Working Paper No. 2505.

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Date of creation: 2008
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Handle: RePEc:ces:ceswps:_2505

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Related research
Keywords: asymmetric information; bequest needs; life insurance;

Other versions of this item:

Find related papers by JEL classification:
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving
G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies

References listed on IDEAS
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  1. Bernheim, B Douglas, 1991. "How Strong Are Bequest Motives? Evidence Based on Estimates of the Demand for Life Insurance and Annuities," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 899-927, October. [Downloadable!] (restricted)
    Other versions:
  2. Pauly, Mark V & Kunreuther, Howard & Hirth, Richard, 1995. "Guaranteed Renewability in Insurance," Journal of Risk and Uncertainty, Springer, vol. 10(2), pages 143-56, March.
  3. Eytan Sheshinski, 2007. "Optimum and Risk-Class Pricing of Annuities," Economic Journal, Royal Economic Society, vol. 117(516), pages 240-251, 01. [Downloadable!] (restricted)
    Other versions:
  4. Campbell, Ritchie A, 1980. " The Demand for Life Insurance: An Application of the Economics of Uncertainty," Journal of Finance, American Finance Association, vol. 35(5), pages 1155-72, December. [Downloadable!] (restricted)
  5. Lewis, Frank D, 1989. "Dependents and the Demand for Life Insurance," American Economic Review, American Economic Association, vol. 79(3), pages 452-67, June. [Downloadable!] (restricted)
  6. Neil A. Doherty & Hal J. Singer & October, . "The Benefits of a Secondary Market ForLife Insurance Policies," Center for Financial Institutions Working Papers 02-41, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
  7. Igal Hendel & Alessandro Lizzeri, 2003. "The Role Of Commitment In Dynamic Contracts: Evidence From Life Insurance," The Quarterly Journal of Economics, MIT Press, vol. 118(1), pages 299-327, February. [Downloadable!] (restricted)
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  8. Cochrane, John H, 1995. "Time-Consistent Health Insurance," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 445-73, June. [Downloadable!] (restricted)
  9. Mattias K. Polborn & Michael Hoy & Asha Sadanand, 2006. "Advantageous Effects of Regulatory Adverse Selection in the Life Insurance Market," Economic Journal, Royal Economic Society, vol. 116(508), pages 327-354, 01. [Downloadable!] (restricted)
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