Premium
The Effect of the Real Option to Transfer on the Value of Guaranteed Minimum Death Benefits
Author(s) -
Ulm Eric R.
Publication year - 2006
Publication title -
journal of risk and insurance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.055
H-Index - 63
eISSN - 1539-6975
pISSN - 0022-4367
DOI - 10.1111/j.1539-6975.2006.00165.x
Subject(s) - annuity , variable (mathematics) , transfer (computing) , economics , life annuity , actuarial science , value (mathematics) , fixed cost , business , microeconomics , finance , computer science , mathematics , mathematical analysis , pension , machine learning , parallel computing
Variable annuity contracts frequently have many options and option‐like features embedded in the contracts. Some are obvious, such as guaranteed minimum death benefits (GMDBs), while others are less obviously option‐like. In this article, we consider the effect of the real option to transfer funds between fixed and variable accounts. If a GMDB rider is considered in isolation, it is sometimes in the policyholder's interest to transfer to the fixed fund if the fixed fund earns less than the variable fund in a risk‐neutral world. On the other hand, the option to transfer will not be used if the entire annuity and rider are considered together.