Discussion Papers, Department of Business and Management Science, Norwegian School of Economics (NHH)
Knut K. Aase
Life Insurance and Pension Contracts I: The Time Additive Life Cycle Model
Abstract: We analyze optimal consumption in the life cycle model by
introducing life and pension insurance contracts. The model contains a
credit market with biometric risk, and market risk via risky securities.
This idealized framework enables us to clarify important aspects life
insurance and pension contracts. We find optimal pension plans and life
insurance contracts where the benefits are state dependent. We compare
these solutions both to the ones of standard actuarial theory, and to
policies offered in practice. Implications of this include what role the
insurance industry may play to improve welfare. The relationship between
substitution of consumption and risk aversion is highlighted in the
presence of a consumption puzzle. One problem related portfolio choice is
discussed - the horizon problem. Finally, we present some comments on
longevity risk and cohort risk.
Keywords: The life cycle model; pension insurance; optimal life insurance; longevity risk; the horizon problem; consumption puzzle; (follow links to similar papers)
JEL-Codes: D91; (follow links to similar papers)
51 pages, March 25, 2014
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