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Life Insurance and Pension Contracts I: The Time Additive Life Cycle Model

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  • Aase, Knut K.

    (Dept. of Business and Management Science, Norwegian School of Economics)

Abstract

We analyze optimal consumption in the life cycle model by introducing life and pension insurance contracts. The model contains a credit market with biometric risk, and market risk via risky securities. This idealized framework enables us to clarify important aspects life insurance and pension contracts. We find optimal pension plans and life insurance contracts where the benefits are state dependent. We compare these solutions both to the ones of standard actuarial theory, and to policies offered in practice. Implications of this include what role the insurance industry may play to improve welfare. The relationship between substitution of consumption and risk aversion is highlighted in the presence of a consumption puzzle. One problem related portfolio choice is discussed - the horizon problem. Finally, we present some comments on longevity risk and cohort risk.

Suggested Citation

  • Aase, Knut K., 2014. "Life Insurance and Pension Contracts I: The Time Additive Life Cycle Model," Discussion Papers 2014/13, Norwegian School of Economics, Department of Business and Management Science.
    • Handle: RePEc:hhs:nhhfms:2014_013
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    File URL: http://hdl.handle.net/11250/194980
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    References listed on IDEAS

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    Cited by:

    1. Andreas Reuß & Jochen Ruß & Jochen Wieland, 2016. "Participating Life Insurance Products with Alternative Guarantees: Reconciling Policyholders’ and Insurers’ Interests," Risks, MDPI, vol. 4(2), pages 1-18, May.
    2. Aase, Knut K., 2014. "The Life Cycle Model with Recursive Utility: New insights on optimal consumption," Discussion Papers 2014/19, Norwegian School of Economics, Department of Business and Management Science, revised 16 Oct 2015.

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    More about this item

    Keywords

    The life cycle model; pension insurance; optimal life insurance; longevity risk; the horizon problem; consumption puzzle;
    All these keywords.

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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