Purchasing Life Insurance to Reach a Bequest Goal
30 Pages Posted: 22 Feb 2014 Last revised: 23 Feb 2014
Date Written: February 21, 2014
We determine how an individual can use life insurance to meet a bequest goal. We assume that the individual's consumption is met by an income, such as a pension, life annuity, or Social Security. Then, we consider the wealth that the individual wants to devote towards heirs (separate from any wealth related to the afore-mentioned income) and find the optimal strategy for buying life insurance to maximize the probability of reaching a given bequest goal. We consider life insurance purchased by a single premium, with and without cash value available. We also consider irreversible and reversible life insurance purchased by a continuously paid premium; one can view the latter as (instantaneous) term life insurance.
Keywords: Term life insurance, whole life insurance, bequest motive, deterministic control
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