Health Shocks and the Demand for Annuities: Technical Paper 2004-09

Sven H. Sinclair and Kent A. Smetters

No 15868, Working Papers from Congressional Budget Office

Abstract: A new explanation is offered for the thin private market for individual annuities in the United States. Individuals face a risk of health shocks which simultaneously cause large uninsured expenses and shorten the life expectancy. The value of a life annuity then decreases at the same time as the need for cash increases, undermining its effectiveness in providing financial security. When the risk of such health shocks is substantial, it is no longer optimal for risk-averse individuals with uncertain life spans to hold all of their wealth in life annuity form, even if annuity

Date: 2004-07-02
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