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Individual Welfare Gains from Deferred Life-Annuities under Stochastic Lee-Carter Mortality

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Author Info
Thomas Post

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Abstract

A deferred annuity typically includes an option-like right for the policyholder. At the end of the deferment period, he may either choose to receive annuity payouts, calculated based on a mortality table agreed to at contract inception, or receive the accumulated capital as a lump sum. Considering stochastic mortality improvements, such an option could be of substantial value. Whenever mortality improves less than originally expected, the policyholder will choose the lump sum and buy an annuity on the market granting him a better price. If, however, mortality improves more than expected, the policyholder will choose to retain the deferred annuity. We use a realistically calibrated life-cycle consumption/saving/asset allocation model and calculate the welfare gains of deferred annuities under stochastic Lee- Carter mortality. Our results are relevant both for individual retirement planning and for policymakers, especially if legislation makes annuitization, at least in part, mandatory. Our results also indicate the maximal willingness to pay for the mortality option inherent in deferred annuities, which is of relevance to insurance pricing.

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Paper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2009-022.

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Length: 37 pages
Date of creation: Apr 2009
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Handle: RePEc:hum:wpaper:sfb649dp2009-022

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Related research
Keywords: Stochastic Mortality; Deferred Annuitization; Retirement Decisions; Annuity Puzzle; Intertemporal Utility Maximization;

Find related papers by JEL classification:
D14 - Microeconomics - - Household Behavior - - - Personal Finance
D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies
J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends and Forecasts
J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies

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