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

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  • Stijn Van Nieuwerburgh

    (New York University)

  • Motohiro Yogo

    (Federal Reserve Bank of Minneapolis)

  • Ralph S. J. Koijen

    (University of Chicago)

Abstract

We develop a pair of risk measures for the universe of health and longevity products that includes life insurance, annuities, and supplementary health insurance. Health delta measures the differential payoff that a policy delivers in poor health, while mortality delta measures the differential payoff that a policy delivers at death. Optimal portfolio choice simplifies to the problem of choosing a combination of health and longevity products that replicates the optimal exposure to health and mortality delta. For each household in Health and Retirement Study, we calculate the health and mortality delta implied by its ownership of life insurance, annuities including defined-benefit plans, supplementary health insurance, and long-term care insurance. For the median household aged 51 to 58, the welfare cost of market incompleteness or suboptimal portfolio choice is 0.22% of wealth over two years and 27% of wealth over the remaining lifetime.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 633.

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Date of creation: 2011
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Handle: RePEc:red:sed011:633

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  1. Mariacristina De Nardi & Eric French & John Bailey Jones, 2009. "Why do the Elderly Save? The Role of Medical Expenses," NBER Working Papers 15149, National Bureau of Economic Research, Inc.
  2. 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.
  3. Alexander Michaelides & Joachim Inkmann, 2011. "Can the Life Insurance Market Provide Evidence for a Bequest Motive?," 2011 Meeting Papers 108, Society for Economic Dynamics.
  4. Joachim Inkmann & Paula Lopes & Alexander Michaelides, 2011. "How Deep Is the Annuity Market Participation Puzzle?," Review of Financial Studies, Society for Financial Studies, vol. 24(1), pages 279-319.
  5. Motohiro Yogo, 2009. "Portfolio Choice in Retirement: Health Risk and the Demand for Annuities, Housing and Risky Assets," Working Papers, Center for Retirement Research at Boston College wp2009-3, Center for Retirement Research, revised Jan 2009.
  6. John Cawley & Tomas Philipson, 1996. "An Empirical Examination of Information Barriers to Trade in Insurance," NBER Working Papers 5669, National Bureau of Economic Research, Inc.
  7. 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.
  8. 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.
  9. 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.
  10. de Meza, David & Webb, David C, 2001. "Advantageous Selection in Insurance Markets," RAND Journal of Economics, The RAND Corporation, vol. 32(2), pages 249-62, Summer.
  11. 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.
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