Life Insurance

A substitute for human capital

Financial Wealth and Demand for Life Insurance has –ve correlation – if richer, can invest the insurance premium in other assets

Probability of death and Demand for Life Insurance – +ve correlation

Risk Aversion and Demand for Life Insurance – +ve correlation – more aggressive in financial portfolio and more risk tolerance for bequest goal (at the same time due to psychology)

Human Capital Volatility and Demand for Life Insurance - -ve correlation – more bond-like capital => more aggressive in financial capital => more insurance; Or consider life insurance as a substitution for human capital

Portfolio with Life Insurance is to maximize the expectation value of at time t:

(1-  P_death)*U_alive*(1-D)*(FC+HC) + P_death*U_death*D*(FC+LIPO)

P_death: probability of death

FC – Financial capital at t+1

HC – Human capital at t+1

LIPO – Life Insurance PayOut

U_alive – Utility derived from accumulating FC and HC

U_death – Utility derived from preparing for bequest

D – Desire to leave a bequest

Risks in Retirement

Saving risk – Use SMarT – Save More Tomorrow Program to mitigate

Longevity risk

Financial risk

Life Cycle:

Preparation => Accumulation => Retirement