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Optimal investment and consumption decision of a family with life insurance

  • Kwak, Minsuk
  • Shin, Yong Hyun
  • Choi, U Jin
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    We study an optimal portfolio and consumption choice problem of a family that combines life insurance for parents who receive deterministic labor income until the fixed time T. We consider utility functions of parents and children separately and assume that parents have an uncertain lifetime. If parents die before time T, children have no labor income and they choose the optimal consumption and portfolio with remaining wealth and life insurance benefit. The object of the family is to maximize the weighted average of utility of parents and that of children. We obtain analytic solutions for the value function and the optimal policies, and then analyze how the changes of the weight of the parents' utility function and other factors affect the optimal policies.

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    File URL: http://www.sciencedirect.com/science/article/B6V8N-51D15PX-2/2/d76390f6947d4b314e00997f329100e2
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    Article provided by Elsevier in its journal Insurance: Mathematics and Economics.

    Volume (Year): 48 (2011)
    Issue (Month): 2 (March)
    Pages: 176-188

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    Handle: RePEc:eee:insuma:v:48:y:2011:i:2:p:176-188
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505554

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    1. Fischer, Stanley, 1973. "A Life Cycle Model of Life Insurance Purchases," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 14(1), pages 132-52, February.
    2. Huang, Huaxiong & Milevsky, Moshe A., 2008. "Portfolio choice and mortality-contingent claims: The general HARA case," Journal of Banking & Finance, Elsevier, vol. 32(11), pages 2444-2452, November.
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    4. Hakansson, Nils H, 1969. "Optimal Investment and Consumption Strategies under Risk, an Uncertain Lifetime, and Insurance," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 10(3), pages 443-66, October.
    5. Fortune, Peter, 1973. "A Theory of Optimal Life Insurance: Development and Tests," Journal of Finance, American Finance Association, vol. 28(3), pages 587-600, June.
    6. 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.
    7. Gabriele Stabile, 2006. "Optimal Timing Of The Annuity Purchase: Combined Stochastic Control And Optimal Stopping Problem," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 9(02), pages 151-170.
    8. Huaxiong Huang & Moshe A. Milevsky & Jin Wang, 2008. "Portfolio Choice and Life Insurance: The CRRA Case," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 75(4), pages 847-872.
    9. 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.
    10. 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.
    11. 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.
    12. Lewis, Frank D, 1989. "Dependents and the Demand for Life Insurance," American Economic Review, American Economic Association, vol. 79(3), pages 452-67, June.
    13. Pliska, Stanley R. & Ye, Jinchun, 2007. "Optimal life insurance purchase and consumption/investment under uncertain lifetime," Journal of Banking & Finance, Elsevier, vol. 31(5), pages 1307-1319, May.
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