Reverse Mortgage Loan to Hedge Longevity Risk-Comparison with Immediate Life Annuities-

Yang Jaehwan; Yoonkyung Yuh; 김혜경

Journal of Insurance and Finance

2014, 25(1), pp.29-73
Publisher : Korea Insurance Research Institute
Research Area : Business Management

Yang Jaehwan ¹ , Yoonkyung Yuh ² , 김혜경 ³

¹ 서울시립대학교
² 이화여자대학교
³ 이화여자대학교 경영학과

ABSTRACT

This paper analyzed the financial and the utility values of the reverse mortgage loan by comparing them with those of the immediate life annuities. The financial value was measured by MW ratio, and the utility value was estimated by RMEA, which is similar to the widely used AEW. First, the results from the financial analysis indicate that, if the value of the reverse mortgage loan consists of the residential value and the annuity value, then the residential value is considerably high in the reverse mortgage loan. The MW ratio varies among the house ownership types, but the MW ratio of the monthly rent type is over 1, and MW ratio of the residential value is higher than MW ratio of the annuity value in the monthly rent type. Regarding utility-based analysis, if the residential cost is ignored, then the immediate life annuity is favorable compared to the reverse mortgage loan. However, if the housing cost is assumed to be 30% of the current value of the house, then the reverse mortgage loan starts becoming a better choice than the immediate life annuity depending on the house value, financial asset, and payout types. Moreover, if the housing cost is assumed to be 50% of the current value of the house, then the reverse mortgage loan becomes a better option than the immediate life annuity for all considered cases. These findings imply that the residential value of the reverse mortgage loan has considerable benefits in lowering the longevity risk, especially for groups who expect certain housing costs.
KEYWORDS

Reverse Mortgage Loan , Immediate Life Annuity , Expected Utility Function , Money’s Worth Ratio
REFERENCES (34)

[other] 국민은행 / 2011 / 월세전환율 조사자료 / 국민은행

[journal] 마승렬 / 2011 / Comparison of the Money's Worth Ratios between Reverse Mortgages and Single Premium Immediate Annuity / 리스크관리연구 / 한국리스크관리학회 22 (2) : 3~39

[web] 서성권 / 2012 / 소액 전세일수록 월세이율 높아, 반전세 고민 / 부동산114 리서치센터 / www.r114.com

[journal] 양재환 / 2010 / Expected Utility Analysis of Private Life Annuity for National Pension Participants / 보험금융연구 / 보험연구원 21 (3) : 105~141

[journal] 양재환 / 2011 / An Optimal Strategy for Private Life Annuity by Utilizing AEW / 산업공학(IE interfaces) / 대한산업공학회 24 (3) : 173~186

[journal] 양재환 / 2010 / An Analysis of Redistribution Effect of the National Pension System Using Expected Utility Function / 보험학회지 / 한국보험학회 (86) : 259~295

[journal] 여윤경 / 2011 / A Study on Individual Retirement Preparedness Index Model / 보험금융연구 / 보험연구원 22 (3) : 33~68

[journal] 여윤경 / 2013 / Value of Reverse Mortgage Loan / 한국증권학회지 / 한국증권학회 42 (2) : 341~371

[journal] 여윤경 / 2009 / Value Analysis of Life Annuity Using Expected Utility Function - with Focus on AEW(Annuity Equivalent Wealth) at Retirement - / 보험금융연구 / 보험연구원 20 (2) : 3~32

[journal] 여윤경 / 2007 / Preparation for Retirement of Korean Households / 소비문화연구 / 한국소비문화학회 10 (3) : 129~155

[confproc] 원종현 / 2010 / 장수위험의 가격측정 / 한국경영학회 통합학술대회 : 1~34

[journal] 이경희 / 2010 / Evaluating the Insurance Value of an Advanced Life Deferred Annuity Using Expected Utility Function / 보험학회지 / 한국보험학회 (87) : 63~96

[journal] 이지영 / 2009 / A Study of Korean Retirees' Retirement Wealth Adequacy and Its Determinants: A Comparison of between Objective Estimation Results and Subjective Recognition / 한국노년학 / 한국노년학회 29 (1) : 215~230

[journal] 임병인 / 2005 / The Effect of the Income Security in the Old Age from the National Pension, the Retirement Pension, and the Private Pension by the Income Classes / 보험금융연구 / 보험연구원 16 (3) : 89~121

[journal] Albrecht, P. / 2002 / Self-annuitization, ruin risk in retirement and asset allocation: The annuity benchmark / Journal of Pension Economics and Finance 1 (3) : 269~288

[journal] Blake, D. / 2003 / Pensionmetrics2: Stochastic pension plan design during the distribution phase / Insurance: Mathematics and Economics 33 (1) : 29~47

[journal] Brown, J. R. / 2000 / Joint Life Annuities and Annuity Demand by Married Couples / Journal of Risk and Insurance 67 (4) : 527~553

[journal] Brown, J. R. / 2001 / Private Pensions, Mortality Risk, and the Decision to Annuitize / Journal of Public Economics 82 (1) : 29~62

[report] Brown, J. R. / 2007 / Rational and Behavioral Perspectives on the Role of Annuities in Retirement Planning / NBER

[journal] Brown, J. R. / 2003 / Redistribution and Insurance: Mandatory Annuitization with Mortality Heterogeneity / Journal of Risk and Insurance 70 (1) : 17~41

[book] Brown, J. R. / 2002 / The Distributional Aspects of Social Security and Social Security Reform / University of Chicago Press : 447~458

[journal] Brown, J. R. / 2008 / Why Don’t People Insure Late Life Consumption? A Framing Explanation of the Under-Annuitization Puzzle / American Economic Review 98 (2) : 304~309

[journal] Cheng, P. / 2003 / Merging Asset Allocation and Longevity Insurance:An Optimal Perspective on Payout Annuities / Journal of Financial Planning 16 (6) : 52~62

[book] Drinkwater, M. / 2004 / Pension Design and Structure: New Lessons from Behavioral Finance / Oxford University Press

[journal] Dus, I. / 2005 / Betting on Death and Capital Markets in Retirement: A Shortfall Risk Analysis of Life Annuities versus Phased Withdrawal Plans / Financial Services Review 14 (3) : 169~196

[journal] Gong, G. / 2008 / Mortality Heterogeneity and the Distributional Consequences of Mandatory Annuitization / Journal of Risk and Insurance 75 (4) : 1055~1079

[journal] Horneff, W. J. / 2008 / Following the Rules:Integrating Asset Allocation and Annuitization in Retirement Portfolios / Insurance: Mathematics and Economics 42 (1) : 396~408

[journal] MacMinn, R. / 2006 / Longevity Risk and Capital Markets / Journal of Risk and Insurance 73 (4) : 551~557

[journal] McCrory, R. T. / 1986 / Mortality Risk in Life Annuities / Transactions of society of actuaries 36 : 309~349

[journal] Milevsky, M. A. / 2005 / A sustainable spending rate without simulation / Financial Analysts Journal 61 (6) : 89~100

[journal] Yuh, Y. / 2011 / The Valuation and Redistribution Effect of the Korea National Pension / Hitotsubashi Journal of Economics 52 (1) : 113~142

[web] / 고용노동부 홈페이지 / http://moel.go.kr

[web] / 통계청 장래인구추계(2011), 가계자산조사(2006) / http://kostat.go.kr

[web] / 한국주택금융공사 홈페이지 / http://www.hf.go.kr
KCI Citation (9)

KJC Korea
Journal Central

Statistics

Tools