Life Annuity Insurance versus Self-Annuitization: An Analysis from the Perspective of the Family

17 Pages Posted: 14 Feb 2007

See all articles by Thomas Post

Thomas Post

Maastricht University - School of Business and Economics - Department of Finance; Netspar

Hato Schmeiser

University of Muenster - Faculty of Economics; University of St. Gallen - I.VW-HSG

Abstract

When comparing investment in an immediate life annuity with a payout-equivalent investment fund decumulation plan (self-annuitization), previous research focused on shortfall probabilities of self-annuitization. Chances of self-annuitization (i.e., bequests) typically have not been addressed. We argue that heirs might be willing to bear the shortfall risk of the retiree's self-annuitization since they might benefit from a bequest. Our article proposes a family strategy in which heirs receive the remaining investment fund on the retiree's death, but are obliged to finance the retiree if the fund becomes exhausted. We estimate the chance and risk profile of this family strategy from the heirs' perspective using German capital and annuity market data. We show that in many cases, our family strategy offers enormous chance potential with low shortfall risk. Finally, we discuss some limitations of the proposed family strategy when putting the concept into practice.

Suggested Citation

Post, Thomas and Schmeiser, Hato, Life Annuity Insurance versus Self-Annuitization: An Analysis from the Perspective of the Family. Risk Management & Insurance Review, Vol. 8, No. 2, pp. 239-255, September 2005. Available at SSRN: https://ssrn.com/abstract=963014 or http://dx.doi.org/10.1111/j.1540-6296.2005.00058.x

Thomas Post

Maastricht University - School of Business and Economics - Department of Finance ( email )

Tongersestraat 53
Maastricht, 6200 MD
Netherlands
+31 43 38 83899 (Phone)
+31 43 38 84875 (Fax)

HOME PAGE: http://www.thomas-post.com

Netspar ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

HOME PAGE: http://www.netspar.nl

Hato Schmeiser (Contact Author)

University of Muenster - Faculty of Economics ( email )

Universitätsstr. 14-16
48143 Munster
Germany

University of St. Gallen - I.VW-HSG ( email )

Kirchlistrasse 2
St. Gallen, 9010
Switzerland

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