Exploring health improvement incentives through wellness-linked products

In this paper, we investigate the potential of wellness-linked life insurance products to encourage policyholders to adopt health-promoting behaviors. We establish two key theoretical contributions: first, we demonstrate a complementary relationship between prevention effort and insurance coverage in wellness-linked products – showing that, in contrast to the classical Ehrlich-Becker (1972) result for traditional insurance, positive effort can be optimal even in the case of full insurance. Second, through a Stackelberg equilibrium framework, where the effort is determined endogenously, we examine the economic pricing and demand for wellness-linked products. Our analysis reveals that wellness-linked products enhance prevention efforts without significantly reducing total insurance coverage, creating value for both parties. Numerical illustrations demonstrate the practical viability of these products, and extensions confirm that our core results carry over to survival-bonus contracts, heterogeneous risk classes, and a health-long-term-care variant.