Human Capital, Asset Allocation, and Life Insurance

Peng Chen, Roger G. Ibbotson, Moshe A. Milevsky, Kevin X. Zhu
2006 CFA Digest  
Human capital should be taken into account when building portfolios for individual investors. One unique risk for an investor's human capital is mortality risk, the loss of human capital in the unfortunate event of premature death. Life insurance hedges against mortality risk. Human capital affects both the optimal asset allocation and the optimal life insurance demand. However, asset allocation and life insurance decisions have consistently been analyzed separately in theory and practice. We
more » ... and practice. We develop a unified human capital based framework to help individual investors make both decisions. We investigate the impact of the size of human capital, its volatility, and its correlation with other assets; bequest preference; and subjective survival probability through five case studies. Our analysis validates some intuitive rules of thumb and provides additional results.
doi:10.2469/dig.v36.n2.4126 fatcat:d2f76xk4hjeahhy7ftls6clzuq