An Investigation of Time Preferences, Life Expectancy and Annuity versus Lump-Sum Choices

Can Smoking Harm Long-Term Saving Decisions?

We investigate proprietary data from an Israeli insurance corporation, and exploit its special pricing feature which does not take health conditions (or smoking status) into account in its annuity pricing. We find that, contrary to the theory suggesting that smokers have higher discount rates and to the policy pricing mechanism, smokers do not prefer the lump-sum option. Two possible explanations are examined. First, that smokers experience a certain degree of self-illusion regarding their own life expectancy and do not perceive themselves as having a shorter lifespan. Second, that smokers are aware of their self-control issues. Hence, they use several mechanisms including annuities, to overcome their temptation to spend their cash. We find support to the life-illusion conjecture with a survey that investigated life expectancy perceptions. We do not find evidence in the administrative data or in the survey responses to support the control of temptation conjecture.