Design and Pricing of Equity‐Linked Life Insurance under Stochastic Interest Rates

Abstract

The authors present a model that incorporates stochastic interest rates to value equity‐linked life insurance contracts. The model generalizes some previous pricing results of Arne and Persson [1994] that are based on deterministic interest rates. The article also proposes and compares a design for a new equity‐linked product with the periodical premium contract of Brennan and Schwartz [1976]. The advantages of the proposed prod‐uct are its simplicity in pricing and its ease of hedging, by using either by long positions in the linked mutual fund or by European call options on the same fund.

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