Towers Watson

About: Towers Watson is a based out in . It is known for research contribution in the topics: Pension & Population. The organization has 126 authors who have published 221 publications receiving 3451 citations. The organization is also known as: Towers Watson & Co..

New Evidence on the Money's Worth of Individual Annuities

Abstract: This paper presents new information on the expected present discounted value of payouts on individual life annuities. The annuity we examine is the single premium immediate life annuity, an insurance product that pays out a nominal level sum as long as the covered person lives, in exchange for an initial lump-sum premium. This annuity offers protection against the risk of someone outliving his saving, given uncertainty about longevity. For reasonable estimates of behavioral parameters, we calculate that individual annuities are currently priced so that retirees without bequest motives should find these policies of substantial value in configuring their portfolios to smooth retirement consumption. We also find that the expected present discounted value of payouts, relative to the initial cost of the annuity, has increased over the last decade. These findings bear on the policy debate regarding the role of individual choice and self-reliance in retirement planning.

Do Divorcing Couples Become Happier By Breaking Up

Abstract: Divorce is a leap in the dark. This paper investigates whether people who split up actually become happier. Using the British Household Panel Survey, we are able to observe an individual's level of psychological wellbeing in the years before and after divorce. Our results show that divorcing couples reap psychological gains from the dissolution of their marriages. Men and women benefit equally. The paper also studies the effects of bereavement, of having dependent children, and of remarriage. We measure wellbeing using GHQ and life-satisfaction scores.

Annuity Prices and Saving Behavior in the United States

Abstract: The observed reluctance of most individuals in the United States to buy individual life annuities, and the concomitant approximately flat average age-wealth profile, stand in sharp contradiction to the standard life cycle model of consumption-saving behavior. The analysis in this paper lends support to an explanation for this phenomenon based on the interaction of an intentional bequest motive and annuity prices that are not actuarially fair. Premiums charged for individual life annuities in the United States include a load factor of 32-48c per dollar,or18-33c per dollar after allowing for adverse selection, in comparison to actuarially fair annuity values. Load factors of this size are not out of line with those on other familiar (and almost universally purchased) insurance products. Simulations of an extended model of life cycle saving and portfolio behavior, allowing explicitly for uncertain lifetimes and Social Security, show that the load factor charged would have to be far larger than this to account for the observed behavior in the absence of a bequest motive. By contrast, the combination of a load factor in this range and a positive bequest motive can do so for some plausible values of the assumed underlying parameters. Moreover,if this combination of factors is leading elderly individuals to avoid purchasing life annuities, it implies a typical bequest that is fairly large in comparison to their consumption.

Optimizing the Equity-Bond-Annuity Portfolio in Retirement: The Impact of Uncertain Health Expenses

Abstract: This paper derives optimal equity-bond-annuity portfolios for households who face stochastic capital market returns, differential exposures to mortality risk and uncertain uninsured health expenses, and differential Social Security and defined benefit pension coverage. The results show that the health spending risk drives household portfolios to shift from risky equities to safer assets and enhances the demand for annuities due to their increasing-with-age superiority over bonds in hedging against life-contingent health spending and longevity risks. Households with higher income have a greater incremental demand for life annuities. The safe and higher-return annuities in turn provide a greater leverage for equity investment in the remaining asset portfolios.

The Life Care Annuity: A New Empirical Examination of an Insurance Innovation That Addresses Problems in the Markets for Life Annuities and Long‐Term Care Insurance

Abstract: The life care annuity--the integration of the life annuity with long-term care insurance coverage--is intended to deal with major problems in the currently separate markets for life annuities and long-term care insurance. The integration would allow the inclusion of most of the population currently rejected by underwriting--those in poor health or lifestyles but who would not go immediately into long-term care claim--who also have lower life expectancies. We make use of the Health and Retirement Study, on individuals in retirement and their disability incidence, exploiting the panel nature of the survey to estimate transition probabilities in and out of disability states according to numerous demographic and health characteristics. This allows for analysis of disability and mortality risk across a number of dimensions. We find that different risk groups at age 65 have similar projected long-term care expenses, but that the level-periodic-premium structure of most long-term care insurance policies creates incentives for individuals to separate into different risk pools according to observable characteristics, justifying the underwriting observed on the market. Yet we also find that gender-rated life care annuities could succeed in pooling risks currently segmented in the market for long-term care insurance, thus qualifying individuals at or near retirement for permanent long-term care insurance coverage who do not currently qualify, and allowing for life annuities to be purchased more cheaply than in the stand-alone annuity market now subject to adverse selection. INTRODUCTION The life care annuity--the integration of the life annuity with long-term care insurance coverage--is intended to deal with major problems in the currently separate markets for life annuities and long-term care insurance. Immediate life annuities are subject to adverse selection of mortality risk--individuals with low longevity expectations are less likely to buy annuities--raising the price of life annuities in market equilibrium and making them seem somewhat expensive to the consumer with even average longevity expectations. Long-term care insurance is intensively underwritten by its issuers, leading to the denial of issuance to a relatively high percentage of potential buyers at the retirement ages, or to policy exclusions. The insurance is also subject to policyholder lapses after purchase, mainly due to liquidity problems, causing welfare losses to those who drop their policies before reaching the ages when making a claim becomes more likely. The idea of creating the life care annuity to solve these problems is put forward empirically by Murtaugh, Spillman, and Warshawsky (2001) (MSW). It is that the integration of two insurance products into one product would allow the inclusion of most of the currently rejected population, those in poor health or lifestyles, who also have lower life expectancies, through the reduction of the need for strict and defensive underwriting for long-term care insurance. It is claimed that the inclusion of the currently rejected population lowers the cost of the life annuity segment for all, by reducing adverse selection, and does not increase the cost of long-term care insurance coverage or impair the generosity of its provisions. Indeed, this is done by attaching permanent long-term care insurance to the life annuity, which leads to the guarantee of coverage for the entire length of the retirement period, and eliminates lapses. The only remaining need for minimal underwriting is to deny coverage to the relatively few who would immediately and obviously go into expensive claim status upon purchase because they are currently disabled or already living in a care facility. There are at least two sets of questions to ask about this idea. The first is whether it will work--that is, can the pricing and coverage properties of the integrated product operate as claimed and will it attract those currently rejected by long-term care underwriting? …