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 make up of his or her future family, much less their financial needs. 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 CIRPEE in its series Cahiers de recherche with number 0742.
Date of creation: 2007
Date of revision:
Life insurance; Bequest needs; Asymmetric information;
Other versions of this item:
- Wenan Fei & Claude Fluet & Harris Schlesinger, 2008. "Uncertain Bequest Needs and Long-Term Insurance Contracts," CESifo Working Paper Series 2505, CESifo Group Munich.
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving
- G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies
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