The Effect of Labor Income and Health Uncertainty on the Valuation of Guaranteed Minimum Death Benefits

Eric R. ULM, Jin GAO

    Research output: Other Conference ContributionsPresentationPresentation

    Abstract

    We examine the effect of labor income and health uncertainty on the optimal choices of policyholders with Guaranteed Minimum Death Benefits embedded in Variable Annuities. These choices are determined in the context of a utility-based life cycle model including bequest motives and optimal term life purchases. We then determine risk-neutral prices from the perspective of the issuing financial institutions. In contrast to previous studies which do not include income and health uncertainty, we find that very risk-averse policyholders in weak job markets would be willing to pay the risk-neutral price in order to receive these benefits. This occurs because an unemployed individual with a low account balance would be unwilling to pay for term insurance, but has precommitted to pay the now small GMDB fees in exchange for the death benefits.
    Original languageEnglish
    Publication statusPublished - 26 Jul 2016
    Event20th International Congress on Insurance: Mathematics and Economics - Georgia State University, Atlanta, United States
    Duration: 24 Jul 201627 Jul 2016
    http://rmi.robinson.gsu.edu/ime-2016/

    Conference

    Conference20th International Congress on Insurance: Mathematics and Economics
    CountryUnited States
    CityAtlanta
    Period24/07/1627/07/16
    Internet address

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    Cite this

    ULM, E. R., & GAO, J. (2016). The Effect of Labor Income and Health Uncertainty on the Valuation of Guaranteed Minimum Death Benefits. 20th International Congress on Insurance: Mathematics and Economics, Atlanta, United States.