Life insurance and annuity demand under hyperbolic discounting

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Abstract

In this paper, we analyse and construct a lifetime utility maximisation model with hyperbolic discounting. Within the model, a number of assumptions are made: complete markets, actuarially fair life insurance/annuity is available, and investors have time-dependent preferences. Time dependent preferences are in contrast to the usual case of constant preferences (exponential discounting). We find: (1) investors (realistically) demand more life insurance after retirement (in contrast to the standard model, which showed strong demand for life annuities), and annuities are rarely purchased; (2) optimal consumption paths exhibit a humped shape (which is usually only found in incomplete markets under the assumptions of the standard model).
Original languageEnglish
Article number43
Pages (from-to)1-10
Number of pages10
JournalRisks
Volume6
Issue number2
DOIs
Publication statusPublished - Jun 2018

Bibliographical note

Copyright 2018 by the authors. Licensee MDPI, Basel, Switzerland. Version archived for private and non-commercial use with the permission of the author/s and according to publisher conditions. For further rights please contact the publisher.

Keywords

  • hyperbolic discounting
  • dynamic programming
  • consumption
  • portfolio rules
  • life insurance
  • life annuity

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