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

  • Stijn Van Nieuwerburgh

    (New York University)

  • Motohiro Yogo

    (Federal Reserve Bank of Minneapolis)

  • Ralph S. J. Koijen

    (University of Chicago)

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.

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Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 633.

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Date of creation: 2011
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Handle: RePEc:red:sed011:633
Contact details of provider: Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
Fax: 1-314-444-8731
Web page: http://www.EconomicDynamics.org/society.htm
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