Optimal decision of dynamic wealth allocation with life insurance for mitigating health risk under market incompleteness

This research proposes a dynamic control modeling of income allocation between life insurance purchase and consumption subject to market incompleteness. We adopt a no-good-deal specification of the multiplicity of stochastic discount factors, and treat death as a stopping time on the individual's health status. Health status non-tradability renders death risk non-hedgeable and the life insurance market incomplete. The no-good-deal condition provides useful guidance for individuals to choose the insurance-income ratio inside good-deal bounds. The magnitude of the influence of market incompleteness on life insurance demand (measured as the width of good-deal bounds) displays life-cycle patterns that converge over time and are highly sensitive to health status characteristics. (C) 2021 Elsevier B.V. All rights reserved.

Automated summary

This research presents a dynamic control model for income allocation in the presence of market incompleteness. The study finds that the incompleteness of the life insurance market is due to the non-tradability of health status, and the impact of market incompleteness on life insurance demand is highly influenced by health status characteristics.