Individual Welfare Gains from Deferred Life-Annuities under Stochastic Mortality

32 Pages Posted: 17 Apr 2009 Last revised: 11 Apr 2012

See all articles by Thomas Post

Thomas Post

Maastricht University - School of Business and Economics - Department of Finance; Netspar

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Date Written: April 11, 2012

Abstract

At the end of the deferment period a deferred annuity’s policyholder can choose between receiving annuity payouts or the capital accumulated. Considering stochastic mortality improvements, this is a valuable option for the policyholder. Whenever mortality improves less than expected at contract inception, the policyholder will choose the lump-sum and buy an annuity at current market prices. Otherwise, he will retain the more favorable deferred annuity. We use a life-cycle model and calculate the welfare gains of deferred annuities considering stochastic mortality improvements. Deferred annuities are found to substantially improve the welfare of an individual. The option feature is especially valuable in the presence of adverse selection problems. The results derived are relevant for individual retirement planning and pension system design.

Keywords: Stochastic Mortality, Annuitization, Individual Retirement Planning, Pensions

JEL Classification: D14, D81, D91, G11, G22, J11, J26

Suggested Citation

Post, Thomas, Individual Welfare Gains from Deferred Life-Annuities under Stochastic Mortality (April 11, 2012). Available at SSRN: https://ssrn.com/abstract=1389733 or http://dx.doi.org/10.2139/ssrn.1389733

Thomas Post (Contact Author)

Maastricht University - School of Business and Economics - Department of Finance ( email )

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HOME PAGE: http://www.thomas-post.com

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