Managing Longevity Risk – The Case for Longevity-Indexed Variable Expiration (LIVE) Bonds

38 Pages Posted: 18 Aug 2018 Last revised: 20 Oct 2018

See all articles by Arun Muralidhar

Arun Muralidhar

AlphaEngine Global Investment Solutions; Georgetown University - McDonough School of Business; George Washington University

Date Written: October 10, 2018


There is an annuity puzzle in that despite the welfare gains to individuals and society from consumers purchasing annuities, the actual allocation to these instruments by individuals is very low. Many explanations have been provided including adverse selection, complexity and inflexibility of the annuity contract, bequest motive etc. Insurance companies have tried to address these issues by changing their products, but take up has still been low. Some have argued that governments should create and issue longevity bonds that attempt to hedge overall economy-wide mortality risk to improve insurance companies’ ability to hedge their annuity offering, thereby lowering costs. But these longevity bonds have some challenges and while an “improving social-welfare” case can be made for why governments should issue such bonds, these proponents have not shown how governments have a natural hedge. Instead, we suggest governments should create Longevity-Indexed Variable Expiration (LIVE) bonds. These bonds, targeted to individuals (and institutions) would pay income-only, and start paying only after the average life-expectancy of the economy (having addressed retirement income through life expectancy with a complementary BFFS/SeLFIES bond). Each bond will be cohort specific and based on tax collections of that cohort. In this fashion, the government is fully hedged (because the bond will be a form of a collateralized debt obligation), and hence a natural issuer, with low credit risk. Since BFFS/SeLFIES cover the life-expectancy of those living less than the average, only those individuals who live beyond the average (usually richer portions of the population) and with limited resources need purchase LIVE bonds. The paper also briefly discusses the portfolio strategies of those living beyond average life expectancy (which raises one challenge with this bond) and also how governments can ensure that they have sufficient funds to bear this risk. It concludes with the challenges to this approach as there are only three levers in addressing this issue through a bond (coupon payments, bonds outstanding and maturity) and allowing maturity to be flexible requires the first two to decline over time and hence in LIVE we focus on just the coupon declining.

Keywords: Annuity Puzzle, Longevity Risk, Longevity Bonds, BFFS, Selfies, Live Bonds, Financial Innovation

JEL Classification: G10, G11

Suggested Citation

Muralidhar, Arun, Managing Longevity Risk – The Case for Longevity-Indexed Variable Expiration (LIVE) Bonds (October 10, 2018). Available at SSRN: or

Arun Muralidhar (Contact Author)

AlphaEngine Global Investment Solutions ( email )

Great Falls, VA
United States


Georgetown University - McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States


George Washington University ( email )

2121 I Street NW
Washington, DC 20052
United States

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