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Optimal decision of dynamic wealth allocation with life insurance for mitigating health risk under market incompleteness

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  • Chen, Chang-Chih
  • Chang, Chia-Chien
  • Sun, Edward W.
  • Yu, Min-Teh

Abstract

This research proposes a dynamic control modeling of income allocation between life insurance purchase and consumption subject to market incompleteness. We adopt a no-good-deal specification of the multiplicity of stochastic discount factors, and treat death as a stopping time on the individual’s health status. Health status non-tradability renders death risk non-hedgeable and the life insurance market incomplete. The no-good-deal condition provides useful guidance for individuals to choose the insurance-income ratio inside good-deal bounds. The magnitude of the influence of market incompleteness on life insurance demand (measured as the width of good-deal bounds) displays life-cycle patterns that converge over time and are highly sensitive to health status characteristics.

Suggested Citation

  • Chen, Chang-Chih & Chang, Chia-Chien & Sun, Edward W. & Yu, Min-Teh, 2022. "Optimal decision of dynamic wealth allocation with life insurance for mitigating health risk under market incompleteness," European Journal of Operational Research, Elsevier, vol. 300(2), pages 727-742.
    • Handle: RePEc:eee:ejores:v:300:y:2022:i:2:p:727-742
    DOI: 10.1016/j.ejor.2021.10.016
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    3. Xiaobai Zhu & Kenneth Q. Zhou & Zijia Wang, 2024. "A new paradigm of mortality modeling via individual vitality dynamics," Papers 2407.15388, arXiv.org, revised Oct 2024.
    4. Barucci, Emilio & Biffis, Enrico & Marazzina, Daniele, 2023. "Health insurance, portfolio choice, and retirement incentives," European Journal of Operational Research, Elsevier, vol. 307(2), pages 910-921.
    5. Chen, An & Ferrari, Giorgio & Zhu, Shihao, 2023. "Striking the Balance: Life Insurance Timing and Asset Allocation in Financial Planning," Center for Mathematical Economics Working Papers 684, Center for Mathematical Economics, Bielefeld University.
    6. R. V. Naveenan & Chee Yoong Liew & Ploypailin Kijkasiwat, 2024. "Nexus Between Financial Inclusion, Digital Inclusion and Health Outcomes: Evidence from Developing Economies," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 174(1), pages 367-408, August.

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