Unlike its commonly negative connotation, moral hazard is a neutral idea in economics and refers simply to the incentive effects created by insurance. Life annuities make payments as long as the annuitant stays alive. Economic theory suggests that a rational individual who owns an annuity should invest more in his or her longevity in order to receive more payments and thereby extend his or her life expectancy. The article reviews this theory and a growing body of empirical evidence supporting it.
Author:
Patrick C. Tricker, JD, MSF, is an associate with Davis & Harman LLP in Washington, D.C. He focuses his legal practice on the taxation of life insurance companies and their products, including annuity contracts. He received his juris doctor from Vanderbilt Law School and his master of science in finance from Vanderbilt’s Owen Graduate School of Management.