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

63 Pages Posted: 10 May 2011 Last revised: 24 Dec 2015

Ralph S. J. Koijen

New York University (NYU) - Department of Finance; Centre for Economic Policy Research (CEPR); 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

Princeton University - Department of Economics; National Bureau of Economic Research

Multiple version iconThere are 2 versions of this paper

Date Written: December 23, 2016

Abstract

We develop a pair of risk measures, health and mortality delta, for the universe of life and health insurance products. A life-cycle model of insurance choice simplifies to replicating the optimal health and mortality delta through a portfolio of insurance products. We estimate the model to explain the observed variation in health and mortality delta implied by the ownership of life insurance, annuities including private pensions, and long-term care insurance in the Health and Retirement Study. For the median household aged 51 to 57, the lifetime welfare cost of market incompleteness and suboptimal choice is 3.2% of total wealth.

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

JEL Classification: D14, D91, G11, I13

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 (December 23, 2016). Journal of Finance, Vol. 71, No. 2, 2016; 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: https://ssrn.com/abstract=1714491 or http://dx.doi.org/10.2139/ssrn.1714491

Ralph S. J. Koijen

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

HOME PAGE: http://www.koijen.net

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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)

Princeton University - Department of Economics ( email )

Julis Romo Rabinowitz Building
Princeton, NJ 08544
United States

HOME PAGE: http://sites.google.com/site/motohiroyogo/

National Bureau of Economic Research

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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