Understanding the Death Benefit Switch Option in Universal Life Policies
Gatzert N, Hoermann G (2011)
Publication Language: English
Publication Type: Journal article, Original article
Publication year: 2011
Journal
Publisher: Wiley-Blackwell
Book Volume: 78
Pages Range: 823-852
Journal Issue: 4
DOI: 10.1111/j.1539-6975.2010.01386.x
Abstract
Universal life policies are the most popular insurance contract design in the United States. They provide either a level death benefit paying a fixed face amount or an increasing death benefit paying a fixed benefit plus the available cash value, and both types include the option to switch from one type to the other. In this article, we investigate the fact that-unlike a switch from level to increasing-a switch from an increasing death benefit to a level death benefit requires neither fees nor evidence of insurability. To assess the impact of the death benefit switch option, we develop a model framework of an increasing universal life insurance policy embedding this option. Consideration of heterogeneity with respect to mortality via a stochastic differential mortality factor enables an investigation of adverse exercise behavior. In a comprehensive simulation analysis, we quantify the net present value of the option from the insurer's perspective using risk-neutral valuation under stochastic interest rates assuming empirical exercise probabilities. Based on our results, we provide policy recommendations for life insurers.
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Germany (DE)How to cite
APA:
Gatzert, N., & Hoermann, G. (2011). Understanding the Death Benefit Switch Option in Universal Life Policies. Journal of Risk and Insurance, 78(4), 823-852. https://dx.doi.org/10.1111/j.1539-6975.2010.01386.x
MLA:
Gatzert, Nadine, and Gudrun Hoermann. "Understanding the Death Benefit Switch Option in Universal Life Policies." Journal of Risk and Insurance 78.4 (2011): 823-852.
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