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Expected Utility Analysis of Private Life Annuity for National Pension Participants

  • Journal of Insurance and Finance
  • 2010, 21(3), pp.105-141
  • Publisher : Korea Insurance Research Institute
  • Research Area : Social Science > Business Management

Yang Jaehwan 1 Yoonkyung Yuh 2

1서울시립대학교
2이화여자대학교

Accredited

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.

Citation status

* References for papers published after 2022 are currently being built.

This paper was written with support from the National Research Foundation of Korea.