Munich Personal RePEc Archive

Return-of-Premium Endorsements for Living-Benefits Insurance Policies: Rational or Irrational?

Strauss, Jason (2007): Return-of-Premium Endorsements for Living-Benefits Insurance Policies: Rational or Irrational?

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Abstract

Insurance companies selling Critical Illness, Disability, and Long-Term Care insurance policies typically offer consumers the option to purchase an endorsement that returns the nominal value of all premiums paid (over the life of the policy) if the policy is not used during the policy term. The endorsement costs the policyholder extra money. Simple calculations show that it is prima facie irrational to purchase the endorsement since the conditional implied rate-of-return on the asset (return-of-premium endorsement) is almost twice as worse as a market index; the unconditional rate of return is even worse. Behavioral explanations for the purchase of these otherwise irrational endorsements are considered.

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