Asset Allocation within Variable Annuities: The Impact of Guarantees

Moshe A. Milevsky and Vladyslav Kyrychenko

in Recalibrating Retirement Spending and Saving

Published in print September 2008 | ISBN: 9780199549108
Published online January 2009 | e-ISBN: 9780191720734 | DOI:
Asset Allocation within Variable Annuities: The Impact of Guarantees

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The latest generation of variable annuity contracts contains equity options plus longevity insurance, sometimes thought to be attractive to purchasers willing to take on financial risk. This chapter examines whether this is indeed the case. Using a unique database, it documents that policyholders do in fact adopt higher equity exposures when these riders are selected. It also examines the theoretical merits of the marketing advice, by deriving the optimal asset allocation in the presence of these guarantees. The chapter concludes that more aggressive equity allocations can indeed be justified in many, although not all, product structures.

Keywords: variable annuity; insurance; retirement portfolio; living benefit rider; guaranteed living benefit; longevity insurance; equity exposures

Chapter.  7533 words.  Illustrated.

Subjects: Pensions

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