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Title: Uncertain Bequest Needs and Long-Term Insurance Contracts
Authors: Fei, Wenan
Fluet, Claude
Schlesinger, Harris
Keywords: Life insurance
Bequest needs
Asymmetric information
Issue Date: 2007-11
Series/Report no.: Cahiers du CIRPÉE;07-42
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 make up of his or her future family, much less their financial needs. 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.
URI: http://132.203.59.36/CIRPEE/cahierscirpee/2007/files/CIRPEE07-42.pdf
https://depot.erudit.org/id/001078dd
Appears in Collections:Cahiers de recherche du CIRPÉE

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