Uncertain Bequest Needs and Long-Term Insurance Contracts
type="main" xml:lang="en"> We examine how long-term life insurance contracts can be designed to incorporate uncertain future bequest needs. An individual who buys a life insurance contract early in life is often uncertain about the future financial needs of his or her family, in the event of an untimely death. Ideally, the individual would like to insure the risk of having high future bequest needs, but since bequest motives are typically unverifiable, a contract directly insuring these needs is not feasible. We derive a long-term life insurance contract that is incentive compatible and achieves a higher welfare level than the naïve strategy of delaying the purchase of insurance until after one's bequest needs are known. We also examine the welfare effects of our contract and we show how third-party financial products, although beneficial to the individual in the short run, can be detrimental to one's ex ante utility.
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Volume (Year): 82 (2015)
Issue (Month): 1 (03)
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