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Maximizing the utility of consumption with commutable life annuities

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  • Wang, Ting
  • Young, Virginia R.

Abstract

The purpose of this paper is to reveal the relation between commutability of life annuities and retirees’ willingness to annuitize. To this end, we assume the existence of commutable life annuities, whose surrender charge is a proportion of their actuarial value. We model a retiree as a utility-maximizing economic agent who can invest in a financial market with a risky and a riskless asset and who can purchase or surrender commutable life annuities. We define the wealth of an individual as the total value of her risky and riskless assets, which is required to be non-negative during her lifetime. We exclude the actuarial value of her annuity income in calculating wealth; therefore, we do not allow the individual to borrow from her future annuity income because this income is contingent on her being alive.

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  • Wang, Ting & Young, Virginia R., 2012. "Maximizing the utility of consumption with commutable life annuities," Insurance: Mathematics and Economics, Elsevier, vol. 51(2), pages 352-369.
    • Handle: RePEc:eee:insuma:v:51:y:2012:i:2:p:352-369
    DOI: 10.1016/j.insmatheco.2012.06.002
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    Cited by:

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    2. Zheng, Wenyuan & Li, Bingqing & Huang, Zhiyong & Chen, Lu, 2022. "Why Was There More Household Stock Market Participation During the COVID-19 Pandemic?," Finance Research Letters, Elsevier, vol. 46(PB).
    3. Wei-Ting Pan, 2016. "The Impact of Mandatory Savings on Life Cycle Consumption and Portfolio Choice," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 32, July-Dece.
    4. Sutcliffe, Charles, 2015. "Trading death: The implications of annuity replication for the annuity puzzle, arbitrage, speculation and portfolios," International Review of Financial Analysis, Elsevier, vol. 38(C), pages 163-174.
    5. Bayraktar, Erhan & Promislow, S. David & Young, Virginia R., 2014. "Purchasing life insurance to reach a bequest goal," Insurance: Mathematics and Economics, Elsevier, vol. 58(C), pages 204-216.
    6. Young, Virginia R., 2017. "Purchasing casualty insurance to avoid lifetime ruin," Insurance: Mathematics and Economics, Elsevier, vol. 77(C), pages 133-142.
    7. Liang, Xiaoqing & Young, Virginia R., 2018. "Annuitization and asset allocation under exponential utility," Insurance: Mathematics and Economics, Elsevier, vol. 79(C), pages 167-183.
    8. Angoshtari, Bahman & Bayraktar, Erhan & Young, Virginia R., 2016. "Minimizing the probability of lifetime drawdown under constant consumption," Insurance: Mathematics and Economics, Elsevier, vol. 69(C), pages 210-223.
    9. Wei-Ting Pan, 2016. "The Impact of Mandatory Savings on Life Cycle Consumption and Portfolio Choice," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 2-2016, January-A.

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