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Uncertain Bequest Needs and Long-Term Insurance Contracts

CIRPEE Working Paper 07-42

CESifo Working Paper Series No. 2505

29 Pages Posted: 1 Dec 2007  

Wenan Fei

Reinsurance Group of America

Claude Fluet

Université Laval

Harris Schlesinger

University of Alabama; CESifo (Center for Economic Studies and Ifo Institute)

Multiple version iconThere are 2 versions of this paper

Date Written: December 2008

Abstract

We examine how long-term life insurance contracts can be designed to incorporate uncertain future bequest needs. An individual who buys a life insurance contract early in life is often uncertain about the future financial needs of his or her family, in the event of an untimely death. Ideally, the individual would like to insure the risk of having high future bequest needs; but since bequest motives are typically unverifiable, a contract directly insuring these needs is not feasible. We derive two equivalent long-term life insurance contracts that are incentive compatible and achieve a higher welfare level than the naive strategy of delaying the purchase of insurance until after one's bequest needs are known. We also examine the welfare effects of such contracts and we show how third-party financial products, although beneficial to the individual in the short run, can be welfare decreasing over one's lifetime.

Keywords: asymmetric information, bequest needs, life insurance

JEL Classification: D82, D91, G22

Suggested Citation

Fei, Wenan and Fluet, Claude and Schlesinger, Harris, Uncertain Bequest Needs and Long-Term Insurance Contracts (December 2008). CIRPEE Working Paper 07-42; CESifo Working Paper Series No. 2505. Available at SSRN: https://ssrn.com/abstract=1034110

Wenan Fei

Reinsurance Group of America ( email )

1370 Timberlake Manor Pkwy
Chesterfield, MO 63017
United States

Claude-Denys Fluet (Contact Author)

Université Laval ( email )

2315 rue de la Terrasse, Université Laval
Quebec, Quebec H3C 3P8
Canada
1-418-656-2131, ext 3290 (Phone)

Harris Schlesinger

University of Alabama ( email )

P.O. Box 870244
200 Alston Hall, Box 870224
Tuscaloosa, AL 35487
United States
205-348-7858 (Phone)
205-348-0590 (Fax)

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

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