Get access

Uncertain Bequest Needs and Long-Term Insurance Contracts

Authors

  • Wenan Fei,

    Search for more papers by this author
    • Wenan Fei is an actuary at the Reinsurance Group of America. Claude Fluet is a Professor of Economics at the Universite du Quebec a Montreal and a research associate at CIRPEE. Harris Schlesinger is a Professor of Finance at the University of Alabama. Harris Schlesinger may be reached via e-mail: hschlesi@cba.ua.edu. We are grateful for helpful comments and suggestions from Tobias Böhm, Christophe Courbage, Michael Hoy, David Myatt, Ray Rees, François Salanié, Achim Wambach, seminar participants at the EGRIE meeting in Toulouse and at the Symposium on Annuities and Bequests in Zurich, as well as four referees.
  • Claude Fluet,

    Search for more papers by this author
    • Wenan Fei is an actuary at the Reinsurance Group of America. Claude Fluet is a Professor of Economics at the Universite du Quebec a Montreal and a research associate at CIRPEE. Harris Schlesinger is a Professor of Finance at the University of Alabama. Harris Schlesinger may be reached via e-mail: hschlesi@cba.ua.edu. We are grateful for helpful comments and suggestions from Tobias Böhm, Christophe Courbage, Michael Hoy, David Myatt, Ray Rees, François Salanié, Achim Wambach, seminar participants at the EGRIE meeting in Toulouse and at the Symposium on Annuities and Bequests in Zurich, as well as four referees.
  • Harris Schlesinger

    Search for more papers by this author
    • Wenan Fei is an actuary at the Reinsurance Group of America. Claude Fluet is a Professor of Economics at the Universite du Quebec a Montreal and a research associate at CIRPEE. Harris Schlesinger is a Professor of Finance at the University of Alabama. Harris Schlesinger may be reached via e-mail: hschlesi@cba.ua.edu. We are grateful for helpful comments and suggestions from Tobias Böhm, Christophe Courbage, Michael Hoy, David Myatt, Ray Rees, François Salanié, Achim Wambach, seminar participants at the EGRIE meeting in Toulouse and at the Symposium on Annuities and Bequests in Zurich, as well as four referees.

Abstract

We examine how long-term life insurance contracts can be designed to incorporate uncertain future bequest needs. An individual who buys a life insurance contract early in life is often uncertain about the future financial needs of his or her family, in the event of an untimely death. Ideally, the individual would like to insure the risk of having high future bequest needs, but since bequest motives are typically unverifiable, a contract directly insuring these needs is not feasible. We derive a long-term life insurance contract that is incentive compatible and achieves a higher welfare level than the naïve strategy of delaying the purchase of insurance until after one's bequest needs are known. We also examine the welfare effects of our contract and we show how third-party financial products, although beneficial to the individual in the short run, can be detrimental to one's ex ante utility.

Ancillary