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Health and Mortality Delta: Assessing the Welfare Cost of Household Insurance Choice

Author

Listed:
  • Stijn Van Nieuwerburgh

    (New York University)

  • Motohiro Yogo

    (Federal Reserve Bank of Minneapolis)

  • Ralph S. J. Koijen

    (University of Chicago)

Abstract

We develop a pair of risk measures for the universe of health and longevity products that includes life insurance, annuities, and supplementary health insurance. Health delta measures the differential payoff that a policy delivers in poor health, while mortality delta measures the differential payoff that a policy delivers at death. Optimal portfolio choice simplifies to the problem of choosing a combination of health and longevity products that replicates the optimal exposure to health and mortality delta. For each household in Health and Retirement Study, we calculate the health and mortality delta implied by its ownership of life insurance, annuities including defined-benefit plans, supplementary health insurance, and long-term care insurance. For the median household aged 51 to 58, the welfare cost of market incompleteness or suboptimal portfolio choice is 0.22% of wealth over two years and 27% of wealth over the remaining lifetime.

Suggested Citation

  • Stijn Van Nieuwerburgh & Motohiro Yogo & Ralph S. J. Koijen, 2011. "Health and Mortality Delta: Assessing the Welfare Cost of Household Insurance Choice," 2011 Meeting Papers 633, Society for Economic Dynamics.
  • Handle: RePEc:red:sed011:633
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    References listed on IDEAS

    as
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    Citations

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    Cited by:

    1. Ralph S.J. Koijen & Motohiro Yogo, 2017. "Risk of Life Insurers: Recent Trends and Transmission Mechanisms," NBER Working Papers 23365, National Bureau of Economic Research, Inc.
    2. Ralph S. J. Koijen & Motohiro Yogo, 2016. "Shadow Insurance," Econometrica, Econometric Society, vol. 84, pages 1265-1287, May.
    3. Previtero, Alessandro, 2014. "Stock market returns and annuitization," Journal of Financial Economics, Elsevier, vol. 113(2), pages 202-214.
    4. Kraft, Holger & Schendel, Lorenz S. & Steffensen, Mogens, 2014. "Life insurance demand under health shock risk," SAFE Working Paper Series 40, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
    5. John Ameriks & Joseph Briggs & Andrew Caplin & Matthew D. Shapiro & Christopher Tonetti, 2016. "The Long-Term-Care Insurance Puzzle: Modeling and Measurement," NBER Working Papers 22726, National Bureau of Economic Research, Inc.

    More about this item

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private

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