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Health and Mortality Delta: Assessing the Welfare Cost of Household Insurance Choice

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  • Ralph Koijen
  • Stijn Van Nieuwerburgh
  • Motohiro Yogo

Abstract

We develop a pair of risk measures, health and mortality delta, for the universe of life and health insurance products. A life-cycle model of insurance choice simplifies to replicating the optimal health and mortality delta through a portfolio of insurance products. We estimate the model to explain the observed variation in health and mortality delta implied by the ownership of life insurance, annuities including private pensions, and long-term care insurance in the Health and Retirement Study. For the median household aged 51 to 57, the lifetime welfare cost of market incompleteness and suboptimal choice is 3.2% of total wealth.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17325.

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Date of creation: Aug 2011
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Handle: RePEc:nbr:nberwo:17325

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  1. Joachim Inkmann & Alexander Michaelides, 2012. "Can the Life Insurance Market Provide Evidence for a Bequest Motive?," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 79(3), pages 671-695, 09.
  2. Mariacristina De Nardi & Eric French & John Bailey Jones, 2009. "Why do the elderly save? the role of medical expenses," Working Paper Series WP-09-02, Federal Reserve Bank of Chicago.
  3. Laurent E. Calvet & John Y. Campbell & Paolo Sodini, 2006. "Down or Out: Assessing the Welfare Costs of Household Investment Mistakes," Harvard Institute of Economic Research Working Papers 2107, Harvard - Institute of Economic Research.
  4. Paula Lopes & Alex Michaelides & Joachim Inkmann, 2009. "How deep is the annuity market participation puzzle?," 2009 Meeting Papers 239, Society for Economic Dynamics.
  5. John Cawley & Tomas Philipson, 1997. "An Empirical Examination of Information Barriers to Trade inInsurance," University of Chicago - George G. Stigler Center for Study of Economy and State 132, Chicago - Center for Study of Economy and State.
  6. Amy Finkelstein & Erzo F.P. Luttmer & Matthew J. Notowidigdo, 2008. "What Good Is Wealth Without Health? The Effect of Health on the Marginal Utility of Consumption," NBER Working Papers 14089, National Bureau of Economic Research, Inc.
  7. Hanming Fang & Michael P. Keane & Dan Silverman, 2008. "Sources of Advantageous Selection: Evidence from the Medigap Insurance Market," Journal of Political Economy, University of Chicago Press, vol. 116(2), pages 303-350, 04.
  8. Motohiro Yogo, 2009. "Portfolio Choice in Retirement: Health Risk and the Demand for Annuities, Housing, and Risky Assets," NBER Working Papers 15307, National Bureau of Economic Research, Inc.
  9. De Meza, D. & Webb, D.C., 2000. "Advantageous Selection in Insurance Market," Discussion Papers 0007, Exeter University, Department of Economics.
  10. John Ameriks & Andrew Caplin & Steven Laufer & Stijn Van Nieuwerburgh, 2007. "The Joy of Giving or Assisted Living? Using Strategic Surveys to Separate Bequest and Precautionary Motives," NBER Working Papers 13105, National Bureau of Economic Research, Inc.
  11. M. Kate Bundorf & Jonathan Levin & Neale Mahoney, 2012. "Pricing and Welfare in Health Plan Choice," American Economic Review, American Economic Association, vol. 102(7), pages 3214-48, December.
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Cited by:
  1. Kraft, Holger & Schendel, Lorenz S. & Steffensen, Mogens, 2014. "Life insurance demand under health shock risk," SAFE Working Paper Series 40, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
  2. Ralph S.J. Koijen & Motohiro Yogo, 2013. "Shadow Insurance," NBER Working Papers 19568, National Bureau of Economic Research, Inc.

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