Bequest-embedded annuities and tontines

Abstract

In the present paper, we propose death benefits be directly embedded in retirement products to promote their attractiveness, where annuities and tontines are used as representative retirement products. As we assume that the death benefits will be passed on to the heirs of policyholders, these benefits can be considered as bequests. We find that both from the policyholders' and insurers' perspective, embedding bequests directly in the retirement products can increase the attractiveness of the retirement products and promote their sale. From the insurers' perspective, without including death benefits, the insurers play purely an administrative role in a tontine product, while adding the bequest benefits makes the tontines real insurance products and incentivizes the insurers to actively provide these innovative retirement products. Further, adding the bequest benefits upon the death of the policyholder, some natural hedging is incorporated in the survival payments, which reduces the solvency capital the insurers are required to set aside.

Keywords: annuity, tontine, bequest motive, optimal retirement product design

JEL Classification: G22, J32