Understanding the Role of Variable and Investment-Linked Deferred Payout Annuities (VILDAS) in Household Portfolios Over the Life Cycle

Raimond Maurer
Finance Department
Goethe University

Olivia S. Mitchell
Wharton School
University of Pennsylvania

Ralph Rogalla
Finance Department
Goethe University

Vasily Kartashov
Finance Department
Goethe University

June 2012 |

This paper assesses the impact of variable investment-linked deferred annuities (VILDAs) on lifecycle consumption, saving, and portfolio allocation patterns given stochastic and systematic mortality. Insurers have taken two approaches to manage systematic mortality risks, namely self-insurance and risk transfer to purchasers of the annuity products. We demonstrate that self-insurance leads to high loadings, so that households offered a choice would favor the risk transfer scheme. Reservation loadings on the actuarially fair VILDA price for non-participation are 0.5-8%; if insurers cannot hedge within this range, they will transfer systematic longevity risks to the annuitants. Our findings have implications for new payout products that may be attractive to older households seeking to protect against retirement shortfalls.

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