Chapter 10 The Impact of Health Status and Out‐of‐Pocket Medical Expenditures on Annuity Valuation

Abstract This chapter describes how differences in health status at retirement can influence the decision to purchase a life annuity. It extends previous research on annuitization decisions by incorporating the effect of health differentials via differences in survival throughout the latter portion of life. It then shows how precautionary savings motivated by uncertain out-of-pocket medical expenses influence annuitization decisions. Results show that annuities become less attractive to people facing uncertain medical expenses. While full annuitization would still be optimal if annuity markets were truly complete and both life- and health-contingent, lacking this, annuity equivalent wealth values are much lower for those in poor health, as compared to persons in good health.