Individual Welfare Gains fromDeferred Life-Annuitiesunder Stochastic Lee-CarterMortality

A deferred annuity typically includes an option-like right for thepolicyholder. At the end of the deferment period, he may either choose toreceive annuity payouts, calculated based on a mortality table agreed to atcontract inception, or receive the accumulated capital as a lump sum.Considering stochastic mortality improvements, such an option could be ofsubstantial value. Whenever mortality improves less than originally expected,the policyholder will choose the lump sum and buy an annuity on the marketgranting him a better price. If, however, mortality improves more thanexpected, the policyholder will choose to retain the deferred annuity. We use arealistically calibrated life-cycle consumption/saving/asset allocation modeland calculate the welfare gains of deferred annuities under stochastic Lee-Carter mortality. Our results are relevant both for individual retirementplanning and for policymakers, especially if legislation makes annuitization, atleast in part, mandatory. Our results also indicate the maximal willingness topay for the mortality option inherent in deferred annuities, which is ofrelevance to insurance pricing.