Uncertain Bequest Needs and Long-Term Insurance Contracts
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 two equivalent long-term life insurance contracts that are incentive compatible and achieve 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 such contracts and we show how third-party financial products, although beneficial to the individual in the short run, can be welfare decreasing over one’s lifetime.
|Date of creation:||2008|
|Contact details of provider:|| Postal: Poschingerstrasse 5, 81679 Munich|
Phone: +49 (89) 9224-0
Fax: +49 (89) 985369
Web page: http://www.cesifo-group.de
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- repec:dau:papers:123456789/5369 is not listed on IDEAS
- Bernheim, B Douglas, 1991.
"How Strong Are Bequest Motives? Evidence Based on Estimates of the Demand for Life Insurance and Annuities,"
Journal of Political Economy,
University of Chicago Press, vol. 99(5), pages 899-927, October.
- B. Douglas Bernheim, 1989. "How Strong are Bequest Motives? Evidence Based on Estimates of the Demand for Life Insurance and Annuities," NBER Working Papers 2942, National Bureau of Economic Research, Inc.
- Eytan Sheshinski, 2007. "Optimum and Risk-Class Pricing of Annuities," Economic Journal, Royal Economic Society, vol. 117(516), pages 240-251, 01.
- Eytan Sheshinski, 2001. "Optimum and Risk-Class Pricing of Annuities," Discussion Paper Series dp327, The Federmann Center for the Study of Rationality, the Hebrew University, Jerusalem.
- Eytan Sheshinski, 2003. "Optimum and Risk-Class Pricing of Annuities," CESifo Working Paper Series 873, CESifo Group Munich.
- Pauly, Mark V & Kunreuther, Howard & Hirth, Richard, 1995. "Guaranteed Renewability in Insurance," Journal of Risk and Uncertainty, Springer, vol. 10(2), pages 143-156, March.
- Lewis, Frank D, 1989. "Dependents and the Demand for Life Insurance," American Economic Review, American Economic Association, vol. 79(3), pages 452-467, June.
- Mattias K. Polborn & Michael Hoy & Asha Sadanand, 2006. "Advantageous Effects of Regulatory Adverse Selection in the Life Insurance Market," Economic Journal, Royal Economic Society, vol. 116(508), pages 327-354, 01.
- Campbell, Ritchie A, 1980. " The Demand for Life Insurance: An Application of the Economics of Uncertainty," Journal of Finance, American Finance Association, vol. 35(5), pages 1155-1172, December.
- Cochrane, John H, 1995. "Time-Consistent Health Insurance," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 445-473, June. Full references (including those not matched with items on IDEAS)