12 - The Utility of Annuitization
from III - ADVANCED TOPICS
Published online by Cambridge University Press: 06 July 2010
Summary
What Is the Protection Worth?
A few months ago I was annoyed by a phone call at home during my family dinner. The person on the other end of the line wanted to sell me an insurance policy to cover a medium-sized sailboat. For less than $200 per month, I would be protected for up to $1,000,000 in damages over the next five years. According to this salesperson, the quote was a “bargain” because insurance premiums were normally twice this amount. The reason his rates were so cheap was that the company was trying to clear out unused insurance “inventory” by the end of the year. I told him that I did not own a boat and thus had no reason to buy the insurance. But the salesperson did not give up. He went on to tell me that insurance prices were going up within a few months and that I'd better hurry before it was too late. … What did this fellow expect me to do? Buy a boat just so I could get cheap insurance?
This might sound like an odd story to tell, but my point here is that protection—whether pension annuity or life insurance policy—is worth nothing to me, regardless of the discounted or present value of the probability-adjusted cash flows, if I have no need for the protection. In this chapter I will pursue and apply this line of thinking to pension annuities and annuitization.
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- Information
- The Calculus of Retirement IncomeFinancial Models for Pension Annuities and Life Insurance, pp. 270 - 292Publisher: Cambridge University PressPrint publication year: 2006