Actuarial Seminar - Aleksandar Arandjelovic (Macquarie Business School)

Title: Life cycle insurance and life annuity loads

Abstract:  We re-examine insurance purchases in life-cycle settings when life insurance and life annuities carry loads. The existing literature typically finds that optimal participation in the market for life-contingent insurance will be continuous throughout life, even under loads. However, the reason for continuous participation turns out to be to an implicit assumption that annuity loads are negative rather than positive. Upon clarifying how this assumption entered the literature, we present realistic examples with positive loads on both life insurance and life annuities. Another novelty in this paper is age-varying bequest motives whereby bequests are necessities during most of working life and luxuries during retirement. Positive annuity loads and age-dependent bequest motives together explain why a substantial demand for life insurance can co-exist with minimal demand for life annuities.
For example, an 18 percent load on both life insurance and life annuities sees substantial demand for life insurance during working life and minimal demand for annuities during retirement.

This is joint work with Geoffrey Kingston and Pavel V. Shevchenko