Expected Utility Analysis of Private Life Annuity for National Pension Participants

Yang Jaehwan; Yoonkyung Yuh

Journal of Insurance and Finance

2010, 21(3), pp.105-141
Publisher : Korea Insurance Research Institute
Research Area : Business Management

Yang Jaehwan ¹ , Yoonkyung Yuh ²

¹ 서울시립대학교
² 이화여자대학교

ABSTRACT

In this paper, by using utility-based measurements, we evaluate the life annuity plans for Korean pre-retired couples participating in the Korea National Pension (KNP). We examine the utility value of life annuity and its specific pattern by major factors such as income, assets, risk aversion, and bequest motives of the couples. For the utility measure, an optimization model is formulated with the objective of maximizing utility on consumption and Dynamic Programming (DP)technique is used to solve the problem. This study provides several important findings regarding the annuity planning strategy for the pre-retired couples participating in the KNP. First, we confirm that private life annuity is an effective tool to improve the couples utility value when they are expecting retirement income from national pension. Second, the results indicate that utility value of life annuity is particularly higher for couples with higher net worth, lower bequest motives, and higher risk aversion levels. Third, we find that optimal rate of annuitization among retirement wealth is consistently decreased when they delay the timing of annuitization. Finally, insurance fee decreases the couples’utility value significantly. These findings have implications for developing the optimal strategies of life annuity in addition to the national pension income.
KEYWORDS

dynamic programming , expected utility function , life annuity , national pension , optimal annuity planning
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