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Return-of-Premium Endorsements for Living-Benefits Insurance Policies: Rational or Irrational?

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  • Strauss, Jason

Abstract

Insurance 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 Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 11103.

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Date of creation: 18 Dec 2007
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Handle: RePEc:pra:mprapa:11103

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Related research

Keywords: Behavioral Economics; Insurance; Critical Illness Insurance; Disability Insurance; Long-Term Care Insurance;

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  1. Tversky, Amos & Kahneman, Daniel, 1986. "Rational Choice and the Framing of Decisions," The Journal of Business, University of Chicago Press, vol. 59(4), pages S251-78, October.
  2. Kunreuther, Howard & Novemsky, Nathan & Kahneman, Daniel, 2001. " Making Low Probabilities Useful," Journal of Risk and Uncertainty, Springer, vol. 23(2), pages 103-20, September.
  3. Shefrin, Hersh M & Thaler, Richard H, 1988. "The Behavioral Life-Cycle Hypothesis," Economic Inquiry, Western Economic Association International, vol. 26(4), pages 609-43, October.
  4. Jeremy J. Siegel & Richard H. Thaler, 1997. "Anomalies: The Equity Premium Puzzle," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 191-200, Winter.
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