Life Cycle Insurance and Life Annuity Loads

We re-examine insurance purchases when life insurance and life annuities carry loads. The life cycle literature says that it is optimal to participate in these insurance markets throughout life, even under loads. A life annuity phase backs directly onto a life insurance phase. However, the reason for this continuous participation turns out to be an implicit assumption that annuity loads are negative rather than positive. Realistic examples with positive loads on both products reveal up to two distinct periods of non-participation, one in midlife and the other adjoining the maximum age. We also investigate age-varying bequest motives whereby bequests are necessities during most of working life and luxuries during retirement. Positive annuity loads and age-varying bequest motives together explain why a substantial demand for life insurance during working life can co-exist with negligible demand for life annuities. A realistic 18 % load on both products generates this outcome