Return-of-Premium Endorsements for Living-Benefits Insurance Policies: Rational or Irrational?
AbstractInsurance companies selling Critical Illness, Disability, and Long-Term Care insurance policies typically offer consumers the option to purchase an endorsement that returns the nominal value of all premiums paid (over the life of the policy) if the policy is not used during the policy term. The endorsement costs the policyholder extra money. Simple calculations show that it is prima facie irrational to purchase the endorsement since the conditional implied rate-of-return on the asset (return-of-premium endorsement) is almost twice as worse as a market index; the unconditional rate of return is even worse. Behavioral explanations for the purchase of these otherwise irrational endorsements are considered.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 11103.
Date of creation: 18 Dec 2007
Date of revision:
Behavioral Economics; Insurance; Critical Illness Insurance; Disability Insurance; Long-Term Care Insurance;
Find related papers by JEL classification:
- G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
- D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
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