Optimal Investments in Annuities and Life Insurance for Retired Couples: The Role of Side Bequest Motives
Martijn de Werd, Bertrand Achou and Ki Wai Chau
Working Paper #25
Retirement and Savings Institute – June 2026
We analyze how bequests made upon the death of the first spouse affect households’ retirement portfolios, particularly the demand for annuities and life insurance. To address this question, we develop a theoretical and quantitative analysis of couples’ investment decisions in the presence of bequests intended for beneficiaries other than the surviving spouse. The results show that life-contingent products help smooth these bequests, as they can make their amount independent of which spouse dies first. We also show that these bequests reduce the wealth transferred to the surviving spouse, while increasing the demand for life insurance or reducing the demand for annuities. Quantitatively, the effects are substantial: annuity participation is 28 percentage points lower for married women and 41 percentage points lower for married men. Finally, the results indicate that these bequests modify the distribution of welfare gains associated with access to life-contingent products, and that omitting them from the design of optimal portfolio strategies can lead to significant welfare costs.