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Evaluation of Life Annuity Plans Based on Utility Maximization : Focused on Comparison with Money's Worth Ratio  

Yang, Jae-Hwan (서울시립대학교 경영학부)
Yuh, Yoon-Kyung (이화여자대학교 경영대학)
Publication Information
Korean Management Science Review / v.27, no.1, 2010 , pp. 45-60 More about this Journal
Abstract
This study evaluates life annuity plans based on two different types of measures : financial benefit and utility on consumption. The financial benefit is measured by Money's Worth (MW) ratio and return on annuity. For the measure of utility, an optimization problem is formulated with the objective of maximizing utility on consumption. To solve the optimization model, we use Dynamic Programming (DP) technique. The both types of measures are applied to cases of Korean pre-retirees at age 40 with different accumulation years of annuity (i.e. level of annuity asset at the age of retirement) and different timings of annuitization. Our results generally indicate that the utility based optimization model is superior to the financial measures in terms of providing a better evaluation of an annuity plan due to its capability to consider an individual's financial situation during his/her retirement period. Also, they suggest that the level of annuity asset is an important factor when an individual determines the optimal annuitization timing.
Keywords
Dynamic Programming; Life Annuity; Longevity Risk; Optimal Annuity Planning; Money's Worth Ratio;
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