Life Insurance

Constrained portfolio optimization in a life-cycle model ArXiv ID: 2410.20060 “View on arXiv” Authors: Unknown Abstract This paper considers the constrained portfolio optimization in a generalized life-cycle model. The individual with a stochastic income manages a portfolio consisting of stocks, a bond, and life insurance to maximize his or her consumption level, death benefit, and terminal wealth. Meanwhile, the individual faces a convex-set trading constraint, of which the non-tradeable asset constraint, no short-selling constraint, and no borrowing constraint are special cases. Following Cuoco (1997), we build the artificial markets to derive the dual problem and prove the existence of the original problem. With additional discussions, we extend his uniformly bounded assumption on the interest rate to an almost surely finite expectation condition and enlarge his uniformly bounded assumption on the income process to a bounded expectation condition. Moreover, we propose a dual control neural network approach to compute tight lower and upper bounds for the original problem, which can be utilized in more general cases than the simulation of artificial markets strategies (SAMS) approach in Bick et al. (2013). Finally, we conclude that when considering the trading constraints, the individual will reduce his or her demand for life insurance. ...

Optimal life insurance and annuity decision under money illusion ArXiv ID: 2410.20128 “View on arXiv” Authors: Unknown Abstract This paper investigates the optimal consumption, investment, and life insurance/annuity decisions for a family in an inflationary economy under money illusion. The family can invest in a financial market that consists of nominal bonds, inflation-linked bonds, and a stock index. The breadwinner can also purchase life insurance or annuities that are available continuously. The family’s objective is to maximize the expected utility of a mixture of nominal and real consumption, as they partially overlook inflation and tend to think in terms of nominal rather than real monetary values. We formulate this life-cycle problem as a random horizon utility maximization problem and derive the optimal strategy. We calibrate our model to the U.S. data and demonstrate that money illusion increases life insurance demand for young adults and reduces annuity demand for retirees. Our findings indicate that the money illusion contributes to the annuity puzzle and highlights the role of financial literacy in an inflationary environment. ...