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http://ssrn.com/abstract=1714491
 
 

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


Ralph S. J. Koijen


London Business School - Department of Finance; National Bureau of Economic Research (NBER)

Stijn Van Nieuwerburgh


New York University Stern School of Business, Department of Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Motohiro Yogo


Federal Reserve Bank of Minneapolis

June 17, 2013

Netspar Discussion Paper No. 05/2011-050
Chicago Booth Research Paper No. 11-34
Fama-Miller Working Paper
NYU Working Paper No. FIN-11-055

Abstract:     
We develop a pair of risk measures for the universe of life and health insurance products. Health delta measures the differential payoff that a product delivers in poor health, while mortality delta measures the differential payoff that a product delivers at death. A life-cycle model of insurance choice simplifies to replicating the optimal health and mortality delta through a portfolio of insurance products. For each household in the Health and Retirement Study, we calculate the health and mortality delta implied by its ownership of life insurance, annuities including private pensions, and long-term care insurance. We then compare them to the optimal health and mortality delta implied by the life-cycle model. For the median household aged 51 to 57, the lifetime welfare cost of market incompleteness and suboptimal choice is 4 percent of total wealth. Both observed household characteristics and unobserved preference heterogeneity fail to explain this welfare cost.

Number of Pages in PDF File: 58

Keywords: Annuity, Health insurance, Life insurance, Life-cycle model, Portfolio choice

JEL Classification: D14, D91, G11, G22, I10

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Date posted: May 10, 2011 ; Last revised: June 17, 2013

Suggested Citation

Koijen, Ralph S. J. and Van Nieuwerburgh, Stijn and Yogo, Motohiro, Health and Mortality Delta: Assessing the Welfare Cost of Household Insurance Choice (June 17, 2013). Netspar Discussion Paper No. 05/2011-050; Chicago Booth Research Paper No. 11-34; Fama-Miller Working Paper; NYU Working Paper No. FIN-11-055. Available at SSRN: http://ssrn.com/abstract=1714491 or http://dx.doi.org/10.2139/ssrn.1714491

Contact Information

Ralph S. J. Koijen
London Business School - Department of Finance ( email )
Sussex Place
Regent's Park
London NW1 4SA
United Kingdom
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Stijn Van Nieuwerburgh
New York University Stern School of Business, Department of Finance ( email )
44 West 4th Street
Suite 9-190
New York, NY 10012-1126
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
Motohiro Yogo (Contact Author)
Federal Reserve Bank of Minneapolis ( email )
90 Hennepin Avenue
Minneapolis, MN 55401-1804
United States
HOME PAGE: http://https://sites.google.com/site/motohiroyogo/
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