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Demand for life annuities from married couples with a bequest motive

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  • VIDAL-MELIÁ, CARLOS
  • LEJÁRRAGA-GARCÍA, ANA

Abstract

The aim of this paper is to explain the ‘annuities puzzle’ in greater depth by introducing the bequest motive. It will try to determine whether this motive really is a relevant feature influencing the demand for life annuities from married couples. With this aim in mind, we develop an optimization model of the utility provided by purchasing a life annuity with contingent survivor benefit or a joint survivor life annuity. Our model is based on that first put forward by Brown and Poterba (2000), to which we have added elements from other models, such as Friedman and Warshawsky's (1990) and Vidal and Lejárraga's (2004), which include the bequest motive. This will enable us to calculate the annuity equivalent wealth and the optimal percentage of wealth to annuitize in various contexts: the possibility of access to actuarially fair annuity markets, the inclusion of so-called market imperfections, and the assumption that couples already have part of their wealth in pre-existing life annuities. Numerical results are presented for the case of Spain. The bequest motive is found not to be a significant factor influencing the demand for annuities from couples. Indeed very few couples would be willing to purchase them once we take into account the combined effects of market imperfections, the possibility of pre-existing annuities and the bequest motive. These findings have repercussions for policy makers regulating defined contribution capitalization systems, which are complementary to defined benefit systems.

Suggested Citation

  • Vidal-Meliá, Carlos & Lejárraga-García, Ana, 2006. "Demand for life annuities from married couples with a bequest motive," Journal of Pension Economics and Finance, Cambridge University Press, vol. 5(2), pages 197-229, July.
    • Handle: RePEc:cup:jpenef:v:5:y:2006:i:02:p:197-229_00
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    Cited by:

    1. Thomas Post & Helmut Gründl & Hato Schmeiser, 2006. "Portfolio management and retirement: what is the best arrangement for a family?," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 20(3), pages 265-285, September.
    2. Griselda Deelstra & Pierre Devolder & Roberta Melis, 2021. "Optimal annuitisation in a deterministic financial environment," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 44(1), pages 161-175, June.
    3. Corinne Mette, "undated". "Wellbeing and dependency among European elderly: The role of social integration," Working Papers 2005-12, FEDEA.
    4. José M. Labeaga & Ester Martínez Ros, "undated". "Persistence and ability in the innovation decisions," Working Papers 2005-16, FEDEA.
    5. M. Martin Boyer & Philippe De Donder & Claude Denys Fluet & Marie-Louise Leroux & Pierre-Carl Michaud, 2018. "A Canadian Parlor Room-Type Approach to the Long-Term Care Insurance Puzzle," CIRANO Working Papers 2018s-13, CIRANO.
    6. Federica Teppa, 2011. "Can the Longevity Risk Alleviate the Annuitization Puzzle? Empirical Evidence from Dutch Data," DNB Working Papers 302, Netherlands Central Bank, Research Department.
    7. de Grip, Andries & Fouarge, Didier & Montizaan, Raymond, 2020. "Redistribution of individual pension wealth to survivor pensions: Evidence from a stated preferences analysis," Journal of Economic Behavior & Organization, Elsevier, vol. 173(C), pages 402-421.
    8. 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).
    9. Yawen Hwang & Shihchieh Chang & Shuhan Yang, 2012. "Measuring the consequences of pension reform applying liquidation and longevity considerations," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 15(3), pages 243-255, September.
    10. Fang, H., 2016. "Insurance Markets for the Elderly," Handbook of the Economics of Population Aging, in: Piggott, John & Woodland, Alan (ed.), Handbook of the Economics of Population Aging, edition 1, volume 1, chapter 0, pages 237-309, Elsevier.
    11. Manuel Ventura-Marco & Carlos Vidal-Meliá & Juan Manuel Pérez-Salamero González, 2022. "Life care annuities to help couples cope with the cost of long-term care," Documentos de Trabajo del ICAE 2022-03, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
    12. Federica Teppa, 2011. "Can the longevity risk alleviate The annuitization puzzle? Empirical evidence from Dutch data," Working Papers 223, ECINEQ, Society for the Study of Economic Inequality.
    13. Lee Lockwood, 2012. "Bequest Motives and the Annuity Puzzle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(2), pages 226-243, April.
    14. José M. Labeaga & Xisco Oliver & Amedeo Spadaro, "undated". "Measuring Changes in Health Capital," Working Papers 2005-15, FEDEA.
    15. Vaz, Thalita A. & Machado, Sérgio J. & Bortoluzzo, Adriana B., 2011. "Estimation of Conversion Rates into Annuities: A Brazilian Perspective," Insper Working Papers wpe_249, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
    16. Pedro N. Rodríguez, & Simón Sosvilla-Rivero, 2006. "Understanding and Forecasting Stock Price Changes," Working Papers 2006-03, FEDEA.
    17. Thomas Post, 2009. "Individual Welfare Gains from Deferred Life-Annuities under Stochastic Lee-Carter Mortality," SFB 649 Discussion Papers SFB649DP2009-022, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    18. Andrés J. Marchante Mera & Bienvenido Ortega Aguaza & José Sánchez Maldonado, 2006. "Las dimensiones del bienestar en las Comunidades Autónomas Españolas. Un análisis de Sigma y Gamma-Convergencia," Working Papers 2006-05, FEDEA.
    19. Stevens, R.S.P., 2011. "Longevity risk in life insurance products," Other publications TiSEM 6533a354-2d66-4219-8086-f, Tilburg University, School of Economics and Management.
    20. Sanders, E.A.T., 2011. "Annuity market imperfections," Other publications TiSEM 227f9684-ccba-4646-99bc-3, Tilburg University, School of Economics and Management.

    More about this item

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies

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