2005), Life Annuity Insurance Versus Self-annuitization: An Analysis from the Perspective

When comparing investment in an immediate life annuity with a payout-equivalent investment fund decumulation plan (self-annuitization), previous research focused on shortfall probabilities of self-annuitization. Chances of self-annuitization (i.e., bequests) typically have not been addressed. We argue that heirs might be willing to bear the shortfall risk of the retiree’s self-annuitization since they might benefit from a bequest. Our article proposes a “family strategy ” in which heirs receive the remaining investment fund on the retiree’s death, but are obliged to finance the re-tiree if the fund becomes exhausted. We estimate the chance and risk profile of this “family strategy ” from the heirs ’ perspective using German capital and annuity market data. We show that in many cases, our “family strategy ” offers enormous chance potential with low shortfall risk. Finally, we discuss some limitations of the proposed “family strategy ” when putting the concept into practice