Life insurance with life annuity

Abstract

We saw in Chapter 1 that a basic feature of human life is that the consumption path is much smoother than the earning path; people consume even when they do not, earn. Another, equally important, characteristic is the so-called longevity risk that is, the date of the death of any person is known in advance neither to him nor to others. Indeed, there are people who die just before retiring, and there are others who live for a hundred years. In the former case, lifetime consumption may be much lower than lifetime earnings; in the latter case, lifetime consumption may be much higher than lifetime earnings. Furthermore, this uncertainty makes self- or family financing much more difficult than it would be in a deterministic world (Fischer, 1973 and Walliser, 2000, 2001). Here we shall examine the ideal system of life insurance with life annuity and then turn to real-life complications.