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Exchanging Variable Annuities: An Optional Test for Suitability

16 Pages Posted: 7 Feb 2004  

Moshe A. Milevsky

York University - Schulich School of Business

Kamphol Panyagometh

NIDA Business School

Abstract

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

Milevsky, Moshe A. and Panyagometh, Kamphol, Exchanging Variable Annuities: An Optional Test for Suitability. Available at SSRN: https://ssrn.com/abstract=496025 or http://dx.doi.org/10.2139/ssrn.496025

Moshe Arye Milevsky (Contact Author)

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

Kamphol Panyagometh

NIDA Business School ( email )

118 Seri Thai
Bangkapi
Bangkok
Thailand

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