An Investigation of Time Preferences, Life Expectancy and Annuity versus Lump-Sum Choices – Can Smoking Harm Long-Term Saving Decisions?

Abstract

We investigate proprietary data from an Israeli insurance corporation, and exploit its special pricing feature which does not take health conditions (or smoking status) into account in its annuity pricing. We find, contrary to the theory suggesting that smokers have higher discount rates and to the policy pricing mechanism, that smokers do not prefer the lump-sum option. A possible explanation could be that smokers do not perceive themselves as having a shorter lifespan, meaning that they experience a certain degree of self-illusion regarding their own life expectancy. We support this conjecture with a survey that investigated life expectancy perceptions.

Keywords: Long Term Savings, Smoking, Annuity