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Title:Individual welfare gains from deferred life-annuities under stochastic Lee-Carter mortality PDF Logo
Authors:Post, Thomas
Issue Date:2009
Series/Report no.:SFB 649 discussion paper 2009,022
Abstract:A deferred annuity typically includes an option-like right for the policyholder. At the end of the deferment period, he may either choose to receive annuity payouts, calculated based on a mortality table agreed to at contract inception, or receive the accumulated capital as a lump sum. Considering stochastic mortality improvements, such an option could be of substantial value. Whenever mortality improves less than originally expected, the policyholder will choose the lump sum and buy an annuity on the market granting him a better price. If, however, mortality improves more than expected, the policyholder will choose to retain the deferred annuity. We use a realistically calibrated life-cycle consumption/saving/asset allocation model and calculate the welfare gains of deferred annuities under stochastic Lee- Carter mortality. Our results are relevant both for individual retirement planning and for policymakers, especially if legislation makes annuitization, at least in part, mandatory. Our results also indicate the maximal willingness to pay for the mortality option inherent in deferred annuities, which is of relevance to insurance pricing.
Subjects:Stochastic Mortality
Deferred Annuitization
Retirement Decisions
Annuity Puzzle
Intertemporal Utility Maximization
JEL:D14
D81
D91
G11
G22
J11
J26
Document Type:Working Paper
Appears in Collections:SFB 649 Discussion Papers, HU Berlin

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