Staff Report 499

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Health and Mortality Delta: Assessing the Welfare Cost of Household Insurance Choice

Ralph S. J. Koijen - London Business School
Stijn Van Nieuwerburgh
Motohiro Yogo - Monetary Advisor

Published June 11, 2014

Abstract
We develop a pair of risk measures, health and mortality delta, for the universe of life and health insurance products. A life-cycle model of insurance choice simplifies to replicating the optimal health and mortality delta through a portfolio of insurance products. We estimate the model to explain the observed variation in health and mortality delta implied by the ownership of life insurance, annuities including private pensions, and long-term care insurance in the Health and Retirement Study. For the median household aged 51 to 57, the lifetime welfare cost of market incompleteness and suboptimal choice is 3.2% of total wealth.


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