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The Impact of Health Status and Out-of-Pocket Medical Expenditures on Annuity Valuation

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Author Info
Cassio M. Turra (University of Pennsylvania)
Olivia S. Mitchell (University of Pennsylvania)

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Abstract

This paper describes how differences in health status at retirement can influence the decision to purchase a life annuity. We extend previous research on annuitization decisions by incorporating the effect of health differentials via differences in survival throughout the latter portion of life. Next, we consider how precautionary savings motivated by uncertain out-of-pocket medical expenses influence annuitization decisions. Our results show that annuities become less attractive to people facing uncertain medical expenses. While full annuitization would still be optimal if annuity markets were truly complete and both life- and health-contingent, lacking this, annuity equivalent wealth values are much lower for those in poor health, as compared to persons in good health.

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File URL: http://www.mrrc.isr.umich.edu/publications/Papers/pdf/wp086.pdf
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Paper provided by University of Michigan, Michigan Retirement Research Center in its series Working Papers with number wp086.

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Length: 29 pages
Date of creation: Jul 2004
Date of revision:
Handle: RePEc:mrr:papers:wp086

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Olivia S. Mitchell et al., 1999. "New Evidence on the Money's Worth of Individual Annuities," American Economic Review, American Economic Association, vol. 89(5), pages 1299-1318, December. [Downloadable!] (restricted)
    Other versions:
  2. Glenn R. Hubbard & Jonathan Skinner & Stephen P. Zeldes, . "Precautionary Saving and Social Insurance," Rodney L. White Center for Financial Research Working Papers 3-95, Wharton School Rodney L. White Center for Financial Research.
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  3. Palumbo, Michael G, 1999. "Uncertain Medical Expenses and Precautionary Saving Near the End of the Life Cycle," Review of Economic Studies, Blackwell Publishing, vol. 66(2), pages 395-421, April. [Downloadable!] (restricted)
  4. Michael Hurd & Daniel McFadden & Angela Merrill, 1999. "Predictors of Mortality Among the Elderly," NBER Working Papers 7440, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Deaton, A. & Grosh, M., 1998. "Consumption," Papers 191, Princeton, Woodrow Wilson School - Development Studies.
  6. Jeffrey R. Brown, 1999. "Are the Elderly Really Over-Annuitized? New Evidence on Life Insurance and Bequests," NBER Working Papers 7193, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  7. James F. Moore & Olivia S. Mitchell, . "Projected Retirement Wealth and Saving Adequacy," Pension Research Council Working Papers 98-1, Wharton School Pension Research Council, University of Pennsylvania.
  8. Thomas Davidoff & Jeffrey Brown & Peter Diamond, 2003. "Annuities And Individual Welfare," Working Papers, Center for Retirement Research at Boston College 2003-11, Center for Retirement Research. [Downloadable!]
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  9. John F. Cogan & Olivia S. Mitchell, 2002. "The Role of Economic Policy in Social Security Reform: Perspectives from the President's Commission," NBER Working Papers 9166, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  10. David M. Cutler & Ellen Meara, 1999. "The Concentration of Medical Spending: An Update," NBER Working Papers 7279, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Jeffrey R. Brown & Mark J. Warshawsky, 2001. "Longevity-Insured Retirement Distributions from Pension Plans: Market and Regulatory Issues," NBER Working Papers 8064, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  12. Olivia S. Mitchell & Michael Gordon & Marc M. Twinney, . "Assessing the Challenges to the Pension System," Pension Research Council Working Papers 95-1, Wharton School Pension Research Council, University of Pennsylvania.
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Jeffrey R. Brown, 2007. "Rational and Behavioral Perspectives on the Role of Annuities in Retirement Planning," NBER Working Papers 13537, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Kam Ki Tang & Jie Zhang, 2007. "Morbidity, Mortality, Health Expenditures and Annuitization," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  3. Thomas Davidoff & Jeffrey R. Brown & Peter A. Diamond, 2005. "Annuities and Individual Welfare," American Economic Review, American Economic Association, vol. 95(5), pages 1573-1590, December. [Downloadable!]
    Other versions:
  4. Gaobo Pang, Mark J. Warshawsk, . "Optimizing the Equity-Bond-Annuity Portfolio in Retirement: The Impact of Uncertain Health Expenses," Research Reports 4, Watson Wyatt Worldwide. [Downloadable!]
  5. Oded Palmon & Avia Spivak, 2007. "Adverse selection and the market for annuities," The Geneva Papers on Risk and Insurance Theory, Springer, vol. 32(1), pages 37-59, June. [Downloadable!] (restricted)
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