The Effect of Labor Income and Health Uncertainty on the Valuation of Guaranteed Minimum Death Benefits

We examine the effect of labor income and health uncertainty on the optimal choices of policyholders with Guaranteed Minimum Death Benefits embedded in Variable Annuities. These choices are determined in the context of a utility-based life cycle model including bequest motives and optimal term life purchases. We then determine riskneutral prices from the perspective of the issuing financial institutions. In contrast to previous studies which do not include income and health uncertainty, we find that very risk-averse policyholders in weak job markets would be willing to pay the risk-neutral price in order to receive these benefits. This occurs because an unemployed individual with a low account balance would be unwilling to pay for term insurance, but has precommitted to pay the now small GMDB fees in exchange for the death benefits. JEL Classification Numbers: D91. MSC Subject Categories: IE12, IB10.