MIS 4500 Lecture Notes - Lecture 19: Life Insurance, Human Capital, Utility
Document Summary
Lecture 19: lifetime financial advice: human capital, asset allocation, and insurance. Human capital: economic pv of investor"s future labor income. Human capital as a risk-free asset: invest in stocks and gradually scale back as gets older. Impact of initial financial wealth: greater percentage allocation to risk-free asset (b/c initial wealth reduces portion of wealth that is safe human capital) Correlation b/w wage growth rate and stock returns: make greater allocation to risk-free asset. Asset allocation and life insurance decisions should be made jointly. Demand for insurance decreases w/ age (primary driver of life insurance is human capital) Mitigate w/ diversification: longevity risk: outlive assets. Hedge w/ insurance products: lifetime annuities / payout annuities: fixed: doesn"t account for erosion by inflation; typically can"t trade out of once purchased, or variable: fluctuates w/ performance of funds investor chooses. Main sources of income: social security; db pension plans; personal savings: risk of spending uncertainty: may not save enough to adequately fund retirement.