Uncertain Bequest Needs and Long‐Term Insurance Contracts

24 Pages Posted: 21 Feb 2015

See all articles by Wenan Fei

Wenan Fei

Reinsurance Group of America

Claude Fluet

University of Quebec at Montreal (UQAM); Centre interuniversitaire sur le risque, les politiques économiques et l'emploi (CIRPÉE)

Harris Schlesinger

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

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Date Written: March 2015

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 a long‐term life insurance contract that is incentive compatible and achieves a higher welfare level than the naïve strategy of delaying the purchase of insurance until after one's bequest needs are known. We also examine the welfare effects of our contract and we show how third‐party financial products, although beneficial to the individual in the short run, can be detrimental to one's ex ante utility.

Suggested Citation

Fei, Wenan and Fluet, Claude and Schlesinger, Harris, Uncertain Bequest Needs and Long‐Term Insurance Contracts (March 2015). Journal of Risk and Insurance, Vol. 82, Issue 1, pp. 125-148, 2015, Available at SSRN: https://ssrn.com/abstract=2567975 or http://dx.doi.org/10.1111/j.1539-6975.2013.12014.x

Wenan Fei (Contact Author)

Reinsurance Group of America ( email )

1370 Timberlake Manor Pkwy
Chesterfield, MO 63017
United States

Claude Fluet

University of Quebec at Montreal (UQAM)

PB 8888 Station DownTown
Succursale Centre Ville
Montreal, Quebec H3C3P8
Canada

Centre interuniversitaire sur le risque, les politiques économiques et l'emploi (CIRPÉE)

Pavillon De Sève
Ste-Foy, Quebec G1K 7P4
Canada

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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