Purchasing Term Life Insurance to Reach a Bequest Goal: Time-Dependent Case

TL;DR

This paper explores how individuals can optimally purchase time-dependent term life insurance to maximize the probability of achieving a specific bequest goal, accounting for varying mortality rates over time.

Contribution

It extends previous models by incorporating a time-varying force of mortality, adding complexity and realism to the optimal insurance purchasing problem.

Findings

Time-dependent mortality significantly affects optimal insurance strategies.

The model provides a more realistic framework for financial planning.

Results highlight the importance of mortality trends in decision making.

Abstract

We consider the problem of how an individual can use term life insurance to maximize the probability of reaching a given bequest goal, an important problem in financial planning. We assume that the individual buys instantaneous term life insurance with a premium payable continuously. By contrast with Bayraktar et al. (2014), we allow the force of mortality to vary with time, which, as we show, greatly complicates the problem.