Exchanging Variable Annuities: An Optional Test for Suitability
16 Pages Posted: 7 Feb 2004
In this paper we offer a novel method of assessing whether exchanging one variable annuity (VA) policy for another, destroys or adds value from a purely economic perspective. We do this by decomposing the policy into a portfolio of financial options and then use an option pricing model to compute the difference in aggregate value between the embedded options in the new and old VA. Our paper illustrates this approach with a variety of case studies using a software implementation that is available on the journal's website. We also draw some general conclusions about the conditions under which a VA exchange is likely to be suitable. Overall, we believe that our methodology is a non-biased and objective technique for mitigating some of the long-standing concerns about excessive churning of VAs.
Keywords: Annuity, income, retirement, portfolio choice
JEL Classification: D11, D91, G11, G23
Suggested Citation: Suggested Citation