Title

Optimal allocation and consumption with guaranteed minimum death benefits, external income and term life insurance

Document Type

Journal article

Source Publication

Insurance : Mathematics and Economics

Publication Date

2015

Volume

61

First Page

87

Last Page

98

Keywords

GMDB, Variable annuity, Expected utility, CRRA, Bequest motive

Abstract

Because human capital is often the largest asset an investor possesses when he is young, protecting human capital from potential risks should be considered as a part of overall investment advice. The risk of the loss of the policyholder’s human capital – the mortality risk – to the household can be partially hedged by a term life insurance policy. Guaranteed Minimum Death Benefits (GMDB) in Variable Annuities (VA) can also help policyholders hedge the risk of the loss of human capital. Therefore, GMDB options and term life insurance can be considered as substitute goods. However, they are not perfect substitute as GMDB and term life have their own properties: Term life insurance has no correlation with equity markets, and it is purely regarded as a protection for human capital; the variable annuity products follow the performance of equity markets, and the GMDB is a protection against downside risks on equity markets as well as human capital. We find that fairly priced GMDB options fail to add value to a VA contract if a term life policy is available.

DOI

10.1016/j.insmatheco.2014.12.004

Print ISSN

01676687

E-ISSN

18735959

Publisher Statement

© 2014 Elsevier B.V. All rights reserved.

Access to external full text or publisher's version may require subscription.

Full-text Version

Publisher’s Version

Recommended Citation

Gao, J. and Ulm, E. R. (2015) Optimal allocation and consumption with guaranteed minimum death benefits, external income and term life insurance. Insurance: Mathematics and Economics, 61, 87-98. DOI: http://dx.doi.org/10.1016/j.insmatheco.2014.12.004

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