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Optimal investment and life insurance strategies under minimum and maximum constraints

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  • Nielsen, Peter Holm
  • Steffensen, Mogens
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    Abstract

    We derive optimal strategies for an individual life insurance policyholder who can control the asset allocation as well as the sum insured (the amount to be paid out upon death) throughout the policy term. We first consider the problem in a pure form without constraints (except nonnegativity on the sum insured) and then in a more general form with minimum and/or maximum constraints on the sum insured. In both cases we also provide the optimal life insurance strategies in the case where risky-asset investments are not allowed (or not taken into consideration), as in basic life insurance mathematics. The optimal constrained strategies are somewhat more complex than the unconstrained ones, but the latter can serve to ease the understanding and implementation of the former.

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    Bibliographic Info

    Article provided by Elsevier in its journal Insurance: Mathematics and Economics.

    Volume (Year): 43 (2008)
    Issue (Month): 1 (August)
    Pages: 15-28

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    Handle: RePEc:eee:insuma:v:43:y:2008:i:1:p:15-28

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    Web page: http://www.elsevier.com/locate/inca/505554

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    1. Cox, John C. & Huang, Chi-fu, 1991. "A variational problem arising in financial economics," Journal of Mathematical Economics, Elsevier, vol. 20(5), pages 465-487.
    2. Erhan Bayraktar & Virginia R. Young, 2007. "Correspondence between Lifetime Minimum Wealth and Utility of Consumption," Papers math/0703820, arXiv.org.
    3. R. C. Merton, 1970. "Optimum Consumption and Portfolio Rules in a Continuous-time Model," Working papers 58, Massachusetts Institute of Technology (MIT), Department of Economics.
    4. Moore, Kristen S. & Young, Virginia R., 2006. "Optimal insurance in a continuous-time model," Insurance: Mathematics and Economics, Elsevier, vol. 39(1), pages 47-68, August.
    5. Campbell, Ritchie A, 1980. " The Demand for Life Insurance: An Application of the Economics of Uncertainty," Journal of Finance, American Finance Association, vol. 35(5), pages 1155-72, December.
    6. Møller,Thomas & Steffensen,Mogens, 2007. "Market-Valuation Methods in Life and Pension Insurance," Cambridge Books, Cambridge University Press, number 9780521868778, April.
    7. Richard, Scott F., 1975. "Optimal consumption, portfolio and life insurance rules for an uncertain lived individual in a continuous time model," Journal of Financial Economics, Elsevier, vol. 2(2), pages 187-203, June.
    8. Cox, John C. & Huang, Chi-fu, 1989. "Optimal consumption and portfolio policies when asset prices follow a diffusion process," Journal of Economic Theory, Elsevier, vol. 49(1), pages 33-83, October.
    9. Hong, Jay H. & Rios-Rull, Jose-Victor, 2007. "Social security, life insurance and annuities for families," Journal of Monetary Economics, Elsevier, vol. 54(1), pages 118-140, January.
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    Cited by:
    1. Erhan Bayraktar & Virginia R. Young, 2012. "Life Insurance Purchasing to Maximize Utility of Household Consumption," Papers 1205.5958, arXiv.org, revised Jun 2013.
    2. Kwak, Minsuk & Shin, Yong Hyun & Choi, U Jin, 2011. "Optimal investment and consumption decision of a family with life insurance," Insurance: Mathematics and Economics, Elsevier, vol. 48(2), pages 176-188, March.

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