Life Annuity Insurance versus Self-Annuitization : An Analysis from the Perspective of the Family

When comparing investment in an immediate life annuity with a payout-equivalentinvestment fund decumulation plan (self-annuitization), previous research focusedon shortfall probabilities of self-annuitization. Chances of self-annuitization (i.e.,bequests) typically have not been addressed. We argue that heirs might be willingto bear the shortfall risk of the retiree’s self-annuitization since they might benefitfrom a bequest. Our article proposes a “family strategy” in which heirs receive theremaining investment fund on the retiree’s death, but are obliged to finance the retireeif the fund becomes exhausted. We estimate the chance and risk profile of this“family strategy” from the heirs’ perspective using German capital and annuitymarket data. We show that in many cases, our “family strategy” offers enormouschance potential with low shortfall risk. Finally, we discuss some limitations of theproposed “family strategy” when putting the concept into practice.