Annuity and Insurance Choice Under Habit Formation

44 Pages Posted: 1 May 2020

See all articles by Phelim P. Boyle

Phelim P. Boyle

Wilfrid Laurier University - School of Business & Economics; University of Waterloo

Ken Seng Tan

University of Waterloo

Pengyu Wei

University of Waterloo - Department of Statistics and Actuarial Science; University of New South Wales (UNSW) - ARC Centre of Excellence in Population Ageing Research (CEPAR); University of Oxford - Oxford-Man Institute of Quantitative Finance

Sheng Chao Zhuang

University of Nebraska Lincoln

Date Written: April 6, 2020

Abstract

This paper examines the impact of habit formation on the demand for life-contingent contracts in a life-cycle model. We derive an analytical solution for the optimal consumption, portfolio choice, and life insurance/annuity purchases. We illustrate the mechanism by which the consumption habit assumption can alter the bequest motive and therefore drive the demand for life-contingent products. We show that habit formation alone can either explain the life insurance puzzle or the annuity puzzle but not both. However, habit formation together with social security can help explain both puzzles.

Keywords: Habit Formation; Life-Cycle Model; Life Insurance; Annuity

Suggested Citation

Boyle, Phelim P. and Tan, Ken Seng and Wei, Pengyu and Zhuang, Sheng Chao, Annuity and Insurance Choice Under Habit Formation (April 6, 2020). Available at SSRN: https://ssrn.com/abstract=3570066 or http://dx.doi.org/10.2139/ssrn.3570066

Phelim P. Boyle

Wilfrid Laurier University - School of Business & Economics ( email )

Waterloo, Ontario N2L 3C5
Canada
519 884 1970 (Phone)
519 888 1015 (Fax)

University of Waterloo

Waterloo, Ontario N2L 3G1
Canada

Ken Seng Tan

University of Waterloo ( email )

Waterloo, Ontario N2L 3G1
Canada

Pengyu Wei

University of Waterloo - Department of Statistics and Actuarial Science ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1
Canada

University of New South Wales (UNSW) - ARC Centre of Excellence in Population Ageing Research (CEPAR) ( email )

Level 6, Central Lobby (enter via East Lobby)
Australian School of Business Building
Sydney, New South Wales NSW 2052
Australia

University of Oxford - Oxford-Man Institute of Quantitative Finance ( email )

University of Oxford, Eagle House
Walton Well Road
Oxford, OX2 6ED
United Kingdom

Sheng Chao Zhuang (Contact Author)

University of Nebraska Lincoln ( email )

Lincoln, NE 68588
United States
4024722330 (Phone)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
61
Abstract Views
556
rank
423,853
PlumX Metrics