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Evaluating the Advanced Life Deferred Annuity - An Annuity People Might Actually Buy

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  • Guan Gong
  • Steven A. Sass

    ()
    (Center for Retirement Research, Boston College)

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    Abstract

    Although annuities provide longevity insurance that should, in theory, be attractive to risk-averse households facing an uncertain lifespan, rates of voluntary annuitization remain extremely low. We evaluate a proposed annuity product, the Advanced Life Deferred Annuity, an annuity purchased at retirement, providing an income commencing in advanced old age. Using numerical optimization techniques, we show that this product would provide a substantial proportion of the longevity insurance provided by an immediate annuity, at a small fraction of the cost. At plausible levels of actuarial unfairness, households should prefer it to both immediate and postponed annuitization, and an optimal decumulation of unannuitized wealth. We show that few households would suffer significant losses were it used as a 401(k) plan default.

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    File URL: http://crr.bc.edu/working-papers/evaluating-the-advanced-life-deferred-annuity-an-annuity-people-might-actually-buy/
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    Bibliographic Info

    Paper provided by Center for Retirement Research in its series Working Papers, Center for Retirement Research at Boston College with number wp2007-15.

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    Length: 28 pages
    Date of creation: Sep 2007
    Date of revision: Sep 2007
    Handle: RePEc:crr:crrwps:wp2007-15

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    1. Leora Friedberg & Anthony Webb, 2006. "Life is Cheap: Using Mortality Bonds to Hedge Aggregate Mortality Risk," NBER Working Papers 11984, National Bureau of Economic Research, Inc.
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