Valuing Variable Annuities with Guaranteed Minimum Lifetime Withdrawal Benefits

36 Pages Posted: 6 Oct 2012

See all articles by Petra Steinorth

Petra Steinorth

St. John's University - Peter J. Tobin College of Business

Olivia S. Mitchell

University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)

Date Written: June 2012

Abstract

This paper examines variable annuities (VA) that include a guaranteed minimum withdrawal lifetime benefit (GWLB). For a risk-averse retiree, we show that the basic VA/GWLB is unlikely to induce systematic withdrawals early in retirement, while it also provides useful protection in the case of extreme longevity. The typical VA/GWLB increases utility compared to not annuitizing, though its money’s worth ratio is slightly lower than not annuitizing. The individual’s portfolio mix elected within the VA has the greatest impact on the valuation of the product, mattering much more than fees or mortality. Having a GWLB prompts riskier portfolio choices up to the point where insurers must restrict the risky share so as to protect solvency.

Suggested Citation

Steinorth, Petra and Mitchell, Olivia S., Valuing Variable Annuities with Guaranteed Minimum Lifetime Withdrawal Benefits (June 2012). Available at SSRN: https://ssrn.com/abstract=2157521 or http://dx.doi.org/10.2139/ssrn.2157521

Petra Steinorth

St. John's University - Peter J. Tobin College of Business ( email )

New York, NY
United States

Olivia S. Mitchell (Contact Author)

University of Pennsylvania - The Wharton School ( email )

Philadelphia, PA 19104-6365
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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