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Three economists have come up with a reason why financial services professionals — and life insurers, and public health experts — have such a hard time helping people: how just about everyone measures the value of life is completely wrong.

David Bauer and two colleagues make that case in a new working paper published behind a paywall on the website of the National Bureau of Economic Research. A copy of the paper is available here.

A worker paper is a draft of an academic paper that has not yet gone through a full peer review process.

Bauer and his colleagues argue in their paper that the fundamental problem with most analyses of efforts to improve people’s health, and to help people live longer, is that experts assume that everyone places roughly the same value on a year of life.

(Related: 3 Ways U.S. Households’ Life and Annuity Use Looks Weird)

In the real world, “we find a given mortality improvement may be worth more, not less, to patients facing shorter lives,” the economists write.

The economists developed and tested that idea using large collections of real-world survey data that are part of the Future Elderly Model, a popular system that helps economists analyze issues that affect people over the age of 50 who have health problems.

One thing the economists found is that, when people want to leave money to their children or others, that “bequest motive” lowers the value of a year of life before age 65 and increases the value of a year of life at older ages.

Increased Risk of Clean Living

The economists also found that annuitizing retirement savings, or converting savings into a stream of retirement income, raises the value of life for the elderly.

When people buy annuities, “this should cause them to spend more on health care and invest more in healthy behaviors, which, in turn, should ultimately manifest in increased life expectancy,” the economists write.

Insurers typically think of the “moral hazard” involved with consumers buying insurance as the risk the insureds will take foolish risks, as a result of the insureds’ awareness that the insurance will protect them against stupidity.

For annuity issuers, the economists write, “moral hazard” translates into the annuity owners taking steps to live longer.

The economists cite earlier studies showing that “people with more generous annuities live longer than those with less generous annuities.”

The economists’ own analysis suggests that owning an annuity increases the value of life even when annuities are actuarially fair. Annuities have that effect “because they protect against the risk of outliving one’s wealth,” the economists write.

Year-of-Life Pricing

The economists say two common factors are responsible for making some years of life worth more than others: Few people know how long they will live, and many people who use annuities annuitize just part of their assets.

If people can annuitize just part of their savings, and they are not sure how long they will live, then modeling shows that an extra year of life will be about 50% more valuable to a sick 70-year-old than it is to a healthy 70-year-old, the economists report.

“We calculate that — holding wealth constant —  a sick individual’s willingness to pay for medical treatment is several times greater than a healthy individual’s willingness to pay for preventive care that improves preventive care by the same amount,” the economists write.

Social Security: Wellness  Incentive Gorilla

The economists note that Social Security and other countries’ public pension programs act like lifetime annuities.

The fact that the programs protect people against outliving their wealthy may increase the value of post-retirement years of life enough to lead to increased spending on post-retirement public health programs, such as Medicare, the economists write.

The economists speculate that the effect of Social Security on the value of years of post-retirement life may be one reason many countries have been spending so much more on health care.

Why Tech Companies Might Care

The economist say expanded use of annuities might help companies marketing life-extension technology increase sales, by easing consumer fears about outliving wealth and making years of post-retirement life more valuable.

— Read Budget Surgeons Might Harvest Your Clients’ Lifespanon ThinkAdvisor.

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