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Life Annuity Insurance Versus Self‐Annuitization: An Analysis From the Perspective of the Family

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  • Hato Schmeiser
  • Thomas Post

Abstract

When comparing investment in an immediate life annuity with a payout‐equivalent investment fund decumulation plan (self‐annuitization), previous research focused on shortfall probabilities of self‐annuitization. Chances of self‐annuitization (i.e., bequests) typically have not been addressed. We argue that heirs might be willing to bear the shortfall risk of the retiree's self‐annuitization since they might benefit from a bequest. Our article proposes a “family strategy” in which heirs receive the remaining investment fund on the retiree's death, but are obliged to finance the retiree if the fund becomes exhausted. We estimate the chance and risk profile of this “family strategy” from the heirs' perspective using German capital and annuity market data. We show that in many cases, our “family strategy” offers enormous chance potential with low shortfall risk. Finally, we discuss some limitations of the proposed “family strategy” when putting the concept into practice.

Suggested Citation

  • Hato Schmeiser & Thomas Post, 2005. "Life Annuity Insurance Versus Self‐Annuitization: An Analysis From the Perspective of the Family," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 8(2), pages 239-255, September.
    • Handle: RePEc:bla:rmgtin:v:8:y:2005:i:2:p:239-255
    DOI: j.1540-6296.2005.00058.x
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    References listed on IDEAS

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    1. Kotlikoff, Laurence J & Spivak, Avia, 1981. "The Family as an Incomplete Annuities Market," Journal of Political Economy, University of Chicago Press, vol. 89(2), pages 372-391, April.
    2. Jeffrey R. Brown, 2003. "Redistribution and Insurance: Mandatory Annuitization With Mortality Heterogeneity," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 70(1), pages 17-41, March.
    3. Brown, Jeffrey R., 2001. "Private pensions, mortality risk, and the decision to annuitize," Journal of Public Economics, Elsevier, vol. 82(1), pages 29-62, October.
    4. Bernheim, B Douglas & Shleifer, Andrei & Summers, Lawrence H, 1986. "The Strategic Bequest Motive," Journal of Labor Economics, University of Chicago Press, vol. 4(3), pages 151-182, July.
    5. Albrecht, Peter & Maurer, Raimond, 2001. "Self-Annuitization, Ruin Risk in Retirement and Asset Allocation: The Annuity Benchmark," Sonderforschungsbereich 504 Publications 01-35, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
    6. Blake, David & Cairns, Andrew J. G. & Dowd, Kevin, 2003. "Pensionmetrics 2: stochastic pension plan design during the distribution phase," Insurance: Mathematics and Economics, Elsevier, vol. 33(1), pages 29-47, August.
    7. Milevsky, Moshe Arye & Ho, Kwok & Robinson, Chris, 1997. "Asset Allocation via the Conditional First Exit Time or How to Avoid Outliving Your Money," Review of Quantitative Finance and Accounting, Springer, vol. 9(1), pages 53-70, July.
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    Cited by:

    1. Stamos, Michael Z., 2008. "Optimal consumption and portfolio choice for pooled annuity funds," Insurance: Mathematics and Economics, Elsevier, vol. 43(1), pages 56-68, August.
    2. Sanders, E.A.T., 2011. "Annuity market imperfections," Other publications TiSEM 227f9684-ccba-4646-99bc-3, Tilburg University, School of Economics and Management.
    3. Lambregts, Timo R. & Schut, Frederik T., 2020. "Displaced, disliked and misunderstood: A systematic review of the reasons for low uptake of long-term care insurance and life annuities," The Journal of the Economics of Ageing, Elsevier, vol. 17(C).

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