Abstract Using a portfolio choice model, we derive the optimal demand for stocks, bonds, annuities, and term life insurance for a retired couple with uncertainty in both lifetimes. We show that the optimal portfolio is heavily weighted with joint annuities and that life insurance is purchased mainly to protect a surviving spouse from loss of annuitized income rather than for bequest. Consistent with these predictions, empirical analyses on Health and Retirement Study data indicate that life insurance holdings are related to the degree of asymmetry in the couple’s annuitized income distribution.

We derive the optimal life-cycle portfolio choice and consumption pattern for households facing uncertain labor income, risky capital market, and mortality risk. In addition to stocks and bonds, the households have access to deferred annuities. Deferred payout life annuities are financial contracts providing life-long income to the annuitant after a specified period of time conditional on survival. We find that deferred annuities play an important role in household portfolios and generate significant welfare gains. Households with high benefits from state pensions, moderate risk aversion and moderate labor income risk purchase deferred annuities from age 40 and gradually increase their portfolio share. At retirement, deferred annuities account for 78% of total financial wealth. Households with low state pensions and high labor income risk purchase more annuities and earlier. Uncertainty with respect to future mortality rates has the same effect, i.e. household hedge against longevity risks using deferred annuities.