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Life Annuity Insurance Versus Self‐Annuitization: An Analysis From the Perspective of the Family
Author(s) -
Schmeiser Hato,
Post Thomas
Publication year - 2005
Publication title -
risk management and insurance review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.386
H-Index - 16
eISSN - 1540-6296
pISSN - 1098-1616
DOI - 10.1111/j.1540-6296.2005.00058.x
Subject(s) - annuity , bequest , life annuity , economics , actuarial science , longevity risk , investment strategy , investment (military) , life insurance , finance , pension , politics , political science , market liquidity , law
When comparing investment in an immediate life annuity with a payout‐equivalent investment fund decumulation plan (self‐annuitization), previous research focused on shortfall probabilities of self‐annuitization. Chances of self‐annuitization (i.e., bequests) typically have not been addressed. We argue that heirs might be willing to bear the shortfall risk of the retiree's self‐annuitization since they might benefit from a bequest. Our article proposes a “family strategy” in which heirs receive the remaining investment fund on the retiree's death, but are obliged to finance the retiree if the fund becomes exhausted. We estimate the chance and risk profile of this “family strategy” from the heirs' perspective using German capital and annuity market data. We show that in many cases, our “family strategy” offers enormous chance potential with low shortfall risk. Finally, we discuss some limitations of the proposed “family strategy” when putting the concept into practice.