Critical illness insurance in life cycle portfolio problems

Lorenz S. Schendel

No 44, SAFE Working Paper Series from Leibniz Institute for Financial Research SAFE

Abstract: I analyze a critical illness insurance in a consumption-investment model over the life cycle. I solve a model with stochastic mortality risk and health shock risk numerically. These shocks are interpreted as critical illness and can negatively affect the expected remaining lifetime, the health expenses, and the income. In order to hedge the health expense effect of a shock, the agent has the possibility to contract a critical illness insurance. My results highlight that the critical illness insurance is strongly desired by the agents. With an insurance profit of 20%, nearly all agents contract the insurance in the working stage of the life cycle and more than 50% of the agents contract the insurance during retirement. With an insurance profit of 200%, still nearly all working agents contract the insurance, whereas there is little demand in the retirement stage.

Keywords: Health shocks; Health expenses; Labor income risk; Stochastic mortality risk; Portfolio choice (search for similar items in EconPapers)
JEL-codes: D91 G11 I13 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-age, nep-hea and nep-ias
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:safewp:44

DOI: 10.2139/ssrn.2403875

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