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Uncertain Bequest Needs and Long-Term Insurance Contracts

  • Wenan Fei
  • Claude Fluet
  • Harris Schlesinger

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 make up of his or her future family, much less their financial needs. 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.

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Paper provided by CIRPEE in its series Cahiers de recherche with number 0742.

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Date of creation: 2007
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Handle: RePEc:lvl:lacicr:0742
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  1. 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.
  2. Pauly, Mark V & Kunreuther, Howard & Hirth, Richard, 1995. "Guaranteed Renewability in Insurance," Journal of Risk and Uncertainty, Springer, vol. 10(2), pages 143-56, March.
  3. 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.
  4. Villeneuve, Bertrand, 2000. "Life Insurance," Economics Papers from University Paris Dauphine 123456789/5369, Paris Dauphine University.
  5. Igal Hendel & Alessandro Lizzeri, 2003. "The Role Of Commitment In Dynamic Contracts: Evidence From Life Insurance," The Quarterly Journal of Economics, MIT Press, vol. 118(1), pages 299-327, February.
  6. 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.
  7. 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 1155-72, December.
  8. Lewis, Frank D, 1989. "Dependents and the Demand for Life Insurance," American Economic Review, American Economic Association, vol. 79(3), pages 452-67, June.
  9. Cochrane, John H, 1995. "Time-Consistent Health Insurance," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 445-73, June.
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