Life cycle insurance, bequest motives and annuity loads

TL;DR

This paper explores how age-varying bequest motives and loads on life insurance and annuities influence demand, revealing periods of non-participation and the coexistence of high insurance demand with low annuity demand.

Contribution

It introduces a model with realistic loads and age-varying bequests, explaining demand patterns and non-participation periods not addressed in prior literature.

Findings

Up to two non-participation periods in midlife and old age.

Necessity bequests during child-rearing years and luxury bequests later.

18% load on both products can produce observed demand patterns.

Abstract

We investigate insurance purchases when bequest motives are age-varying and life insurance and life annuities both carry loads. The existing life cycle literature assumes bequests are normal goods without being either necessities or luxuries. Much of the literature also assumes implicitly that life annuity loads are negative. A key finding of the literature is that the demand for life insurance and the demand for life annuities are symmetrical. It is optimal to buy life-contingent insurance throughout life, even under loads. A life annuity phase backs directly onto a life insurance phase. We find that realistic examples with positive loads on both products reveal up to two distinct periods of non-participation, one in midlife and the other adjoining the maximum age. We highlight examples with necessity bequests during child-rearing years and luxury bequests thereafter. This set of assumptions explains why a substantial demand for life insurance during child-rearing years can co-exist with negligible demand for life annuities later on. A realistic 18% load on both products generates this outcome.