Faculty of Economics and Business Administration Publications Database

Lifecycle Portfolio Choice With Systematic Longevity Risk and Variable Investment-linked Deferred Annuities

Mitchell, Olivia S.
Rogalla, Ralph
Kartashov, Vasily
Volume: 80
Number: 3
Pages: 649 - 676
Month: September
ISSN-Print: 0022-4367
Link External Source: Online Version
Year: 2013

This article assesses the impact of variable investment-linked deferred annuities (VILDAs) on lifecycle consumption and portfolio allocation, allowing for systematic longevity risk. Under a self-insurance strategy, insurers set premiums to reduce the chance that benefits paid exceed provider reserves. Under a participating approach, the provider avoids taking systematic longevity risk by adjusting benefits in response to unanticipated mortality shocks. Young households with participating annuities average one-third higher excess consumption, while 80-year-olds increase consumption about 75 percent. Many households would prefer to participate in systematic longevity risk unless insurers can hedge it at a very low price.