Health and Mortality Delta: Assessing the Welfare Cost of Household Insurance Choice

Stijn Van Nieuwerburgh, Motohiro Yogo and Ralph Koijen

No 633, 2011 Meeting Papers from Society for Economic Dynamics

Abstract: We develop a pair of risk measures for the universe of health and longevity products that includes life insurance, annuities, and supplementary health insurance. Health delta measures the differential payoff that a policy delivers in poor health, while mortality delta measures the differential payoff that a policy delivers at death. Optimal portfolio choice simplifies to the problem of choosing a combination of health and longevity products that replicates the optimal exposure to health and mortality delta. For each household in Health and Retirement Study, we calculate the health and mortality delta implied by its ownership of life insurance, annuities including defined-benefit plans, supplementary health insurance, and long-term care insurance. For the median household aged 51 to 58, the welfare cost of market incompleteness or suboptimal portfolio choice is 0.22% of wealth over two years and 27% of wealth over the remaining lifetime.

Date: 2011
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Related works:
Journal Article: Health and Mortality Delta: Assessing the Welfare Cost of Household Insurance Choice (2016)
Working Paper: Health and Mortality Delta: Assessing the Welfare Cost of Household Insurance Choice (2014)
Working Paper: Health and Mortality Delta: Assessing the Welfare Cost of Household Insurance Choice (2011)
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