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Purchasing life insurance to reach a bequest goal

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  • Bayraktar, Erhan
  • Promislow, S. David
  • Young, Virginia R.

Abstract

We determine how an individual can use life insurance to meet a bequest goal. We assume that the individual’s consumption is met by an income from a job, pension, life annuity, or Social Security. Then, we consider the wealth that the individual wants to devote towards heirs (separate from any wealth related to the afore-mentioned income) and find the optimal strategy for buying life insurance to maximize the probability of reaching a given bequest goal. We consider life insurance purchased by a single premium, with and without cash value available. We also consider irreversible and reversible life insurance purchased by a continuously paid premium; one can view the latter as (instantaneous) term life insurance.

Suggested Citation

  • 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.
    • Handle: RePEc:eee:insuma:v:58:y:2014:i:c:p:204-216
    DOI: 10.1016/j.insmatheco.2014.07.003
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    References listed on IDEAS

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    1. Moshe A. Milevsky & Kristen S. Moore & Virginia R. Young, 2006. "Asset Allocation And Annuity‐Purchase Strategies To Minimize The Probability Of Financial Ruin," Mathematical Finance, Wiley Blackwell, vol. 16(4), pages 647-671, October.
    2. Richard, Scott F., 1975. "Optimal consumption, portfolio and life insurance rules for an uncertain lived individual in a continuous time model," Journal of Financial Economics, Elsevier, vol. 2(2), pages 187-203, June.
    3. 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.
    4. Sid Browne, 1999. "Beating a moving target: Optimal portfolio strategies for outperforming a stochastic benchmark," Finance and Stochastics, Springer, vol. 3(3), pages 275-294.
    5. Erhan Bayraktar & Virginia Young, 2013. "Life Insurance Purchasing to Maximize Utility of Household Consumption," North American Actuarial Journal, Taylor & Francis Journals, vol. 17(2), pages 114-135.
    6. William D. Sudderth & Ananda Weerasinghe, 1989. "Controlling a Process to a Goal in Finite Time," Mathematics of Operations Research, INFORMS, vol. 14(3), pages 400-409, August.
    7. Wang, Ting & Young, Virginia R., 2012. "Optimal commutable annuities to minimize the probability of lifetime ruin," Insurance: Mathematics and Economics, Elsevier, vol. 50(1), pages 200-216.
    8. Sid Browne, 1997. "Survival and Growth with a Liability: Optimal Portfolio Strategies in Continuous Time," Mathematics of Operations Research, INFORMS, vol. 22(2), pages 468-493, May.
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    Cited by:

    1. Huang, Huaxiong & Milevsky, Moshe A., 2016. "Longevity risk and retirement income tax efficiency: A location spending rate puzzle," Insurance: Mathematics and Economics, Elsevier, vol. 71(C), pages 50-62.
    2. Bayraktar, Erhan & Young, Virginia R., 2016. "Optimally investing to reach a bequest goal," Insurance: Mathematics and Economics, Elsevier, vol. 70(C), pages 1-10.
    3. Wei Han & Ping Wang & Hongjie Dong, 2020. "Influence of Egoistic and Altruistic Bequest Motives on the Willingness to Participate in Reverse Mortgages in China," Asian Economic Journal, East Asian Economic Association, vol. 34(4), pages 430-463, December.
    4. Angoshtari, Bahman & Bayraktar, Erhan & Young, Virginia R., 2015. "Minimizing the expected lifetime spent in drawdown under proportional consumption," Finance Research Letters, Elsevier, vol. 15(C), pages 106-114.
    5. Erhan Bayraktar & S. David Promislow & Virginia R. Young, 2015. "Purchasing Term Life Insurance to Reach a Bequest Goal: Time-Dependent Case," North American Actuarial Journal, Taylor & Francis Journals, vol. 19(3), pages 224-236, July.
    6. Asaf Cohen & Virginia R. Young, 2015. "Minimizing Lifetime Poverty with a Penalty for Bankruptcy," Papers 1509.01694, arXiv.org.
    7. Erhan Bayraktar & David Promislow & Virginia Young, 2014. "Purchasing Term Life Insurance to Reach a Bequest Goal while Consuming," Papers 1412.2262, arXiv.org, revised Feb 2016.
    8. Fangyuan Dong & Nick Halen & Kristen Moore & Qinglai Zeng, 2019. "Efficient Retirement Portfolios: Using Life Insurance to Meet Income and Bequest Goals in Retirement," Risks, MDPI, vol. 7(1), pages 1-11, January.
    9. Landriault, David & Li, Bin & Li, Danping & Li, Dongchen, 2016. "A pair of optimal reinsurance–investment strategies in the two-sided exit framework," Insurance: Mathematics and Economics, Elsevier, vol. 71(C), pages 284-294.

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