Dynamic Bequest Motives and Secondary Markets for Life Insurance

44 Pages Posted: 15 Nov 2016 Last revised: 4 Mar 2017

See all articles by Cameron Ellis

Cameron Ellis

University of Iowa - Department of Finance

Date Written: March 3, 2017


Life insurance contracts can be exceptionally long term and are typically written with a level premium structure. Because death risk increases with age, the actuarial value of a life insurance policy increases over time and becomes positive far enough into the policy. Life insurance is also unique in that the payout is valued through a bequest motive. If bequest preferences are dynamic and subject to unexpected shocks, the consumer's value of a life insurance contract can become negative even when the actuarial value is positive. Thus, there are potential gains from trade from a secondary market for life insurance policies. While these markets do exist, they are limited and controversial. In this paper, I propose and estimate a life-cycle savings model for the life insurance lapse decision with dynamic, heterogeneous bequest motives. I then perform a counterfactual analysis with competitive secondary markets and find them to be Pareto improving for my sample with an average value increase to consumer's welfare by $1,346 per policy-holder.

Keywords: Lapsed Policies, Credit Constraints, Life Cycle, Approximate Dynamic Programming

JEL Classification: C45, C61, D14, D81, D82, G22

Suggested Citation

Ellis, Cameron, Dynamic Bequest Motives and Secondary Markets for Life Insurance (March 3, 2017). Available at SSRN: https://ssrn.com/abstract=2862508 or http://dx.doi.org/10.2139/ssrn.2862508

Cameron Ellis (Contact Author)

University of Iowa - Department of Finance ( email )

Iowa City, IA 52242-1000
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
PlumX Metrics