Working Paper: NBER ID: w17325
Authors: Ralph Koijen; Stijn Van Nieuwerburgh; Motohiro Yogo
Abstract: We develop a pair of risk measures, health and mortality delta, for the universe of life and health insurance products. A life-cycle model of insurance choice simplifies to replicating the optimal health and mortality delta through a portfolio of insurance products. We estimate the model to explain the observed variation in health and mortality delta implied by the ownership of life insurance, annuities including private pensions, and long-term care insurance in the Health and Retirement Study. For the median household aged 51 to 57, the lifetime welfare cost of market incompleteness and suboptimal choice is 3.2% of total wealth.
Keywords: health delta; mortality delta; insurance choice; welfare cost; lifecycle model
JEL Codes: D14; D91; G11; I13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| lifecycle model (O41) | variation in observed health delta (I14) |
| lifecycle model (O41) | variation in mortality delta (I12) |
| married households and those with living children (J12) | stronger bequest motives (D15) |
| stronger bequest motives (D15) | insurance demand (G52) |
| market incompleteness and suboptimal choice (D52) | welfare cost (D69) |
| choices over life insurance and annuities (G52) | welfare impact (D69) |
| deviations from optimal demand (D12) | welfare costs (I30) |
| lifecycle model prescribes (O41) | decrease in health and mortality delta (I14) |
| observed delta (C69) | persistent (C41) |