Uncertain Bequest Needs and Long-Term Insurance Contracts

Wenan Fei, Claude Fluet and Harris Schlesinger

No 2505, CESifo Working Paper Series from CESifo

Abstract: We examine how long-term life insurance contracts can be designed to incorporate uncertain future bequest needs. An individual who buys a life insurance contract early in life is often uncertain about the future financial needs of his or her family, in the event of an untimely death. Ideally, the individual would like to insure the risk of having high future bequest needs; but since bequest motives are typically unverifiable, a contract directly insuring these needs is not feasible. We derive two equivalent long-term life insurance contracts that are incentive compatible and achieve a higher welfare level than the naïve strategy of delaying the purchase of insurance until after one’s bequest needs are known. We also examine the welfare effects of such contracts and we show how third-party financial products, although beneficial to the individual in the short run, can be welfare decreasing over one’s lifetime.

Keywords: asymmetric information; bequest needs; life insurance (search for similar items in EconPapers)
JEL-codes: D82 D91 G22 (search for similar items in EconPapers)
Date: 2008
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Related works:
Journal Article: Uncertain Bequest Needs and Long-Term Insurance Contracts (2015)
Working Paper: Uncertain Bequest Needs and Long-Term Insurance Contracts (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_2505

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