IDEAS home Printed from https://ideas.repec.org/p/arx/papers/2608.04532.html

Optimal Life Insurance Decision in Mean-Variance DC Management with Mortality Improvements

Author

Listed:
  • Yueman Feng
  • Wenyuan Li
  • Mengyi Xu
  • Pengyu Wei

Abstract

This paper studies the investment and insurance strategies of defined-contribution (DC) pension plans under the mean-variance framework. We consider a stochastic environment with time-varying interest rates, contributions, and mortality risk. The DC plan members are allowed to decide their bond and stock allocations, as well as their life insurance coverage. Adopting the martingale approach, we derive the closed-form optimal strategies and the mean-variance efficient frontier. Further numerical analysis investigates how mortality improvements affect investment and insurance decisions, as well as the sensitivity of the optimal decision to market parameters. Our analysis suggests that longevity raises expectations of future contributions, allowing pension members to adopt a less risky investment strategy. Meanwhile, insurance strategy shifts toward early adulthood to protect the high value of future income and decreases significantly at later ages. Moreover, we conduct sensitivity analyses on the target expected wealth, market price of risk, and contribution growth. These findings provide practical guidance for pension members on investment and offer insights for the design of DC pension plans.

Suggested Citation

  • Yueman Feng & Wenyuan Li & Mengyi Xu & Pengyu Wei, 2026. "Optimal Life Insurance Decision in Mean-Variance DC Management with Mortality Improvements," Papers 2608.04532, arXiv.org, revised Aug 2026.
    • Handle: RePEc:arx:papers:2608.04532
    as

    Download full text from publisher

    File URL: https://arxiv.org/pdf/2608.04532
    File Function: Latest version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. He, Lin & Liang, Zongxia, 2013. "Optimal investment strategy for the DC plan with the return of premiums clauses in a mean–variance framework," Insurance: Mathematics and Economics, Elsevier, vol. 53(3), pages 643-649.
    2. Munk, Claus & Sørensen, Carsten, 2010. "Dynamic asset allocation with stochastic income and interest rates," Journal of Financial Economics, Elsevier, vol. 96(3), pages 433-462, June.
    3. Yao, Haixiang & Lai, Yongzeng & Ma, Qinghua & Jian, Minjie, 2014. "Asset allocation for a DC pension fund with stochastic income and mortality risk: A multi-period mean–variance framework," Insurance: Mathematics and Economics, Elsevier, vol. 54(C), pages 84-92.
    4. Chen, An & Delong, Łukasz, 2015. "Optimal Investment For A Defined-Contribution Pension Scheme Under A Regime Switching Model," ASTIN Bulletin, Cambridge University Press, vol. 45(2), pages 397-419, May.
    5. Bian, Lihua & Li, Zhongfei & Yao, Haixiang, 2018. "Pre-commitment and equilibrium investment strategies for the DC pension plan with regime switching and a return of premiums clause," Insurance: Mathematics and Economics, Elsevier, vol. 81(C), pages 78-94.
    6. Dong, Yinghui & Zheng, Harry, 2020. "Optimal investment with S-shaped utility and trading and Value at Risk constraints: An application to defined contribution pension plan," European Journal of Operational Research, Elsevier, vol. 281(2), pages 341-356.
    7. Han, Nan-wei & Hung, Mao-wei, 2012. "Optimal asset allocation for DC pension plans under inflation," Insurance: Mathematics and Economics, Elsevier, vol. 51(1), pages 172-181.
    8. Chen, Zheng & Li, Zhongfei & Zeng, Yan, 2023. "Portfolio choice with illiquid asset for a loss-averse pension fund investor," Insurance: Mathematics and Economics, Elsevier, vol. 108(C), pages 60-83.
    9. Gao, Shuping & Guo, Junyi & Liang, Xiaoqing, 2025. "Bayesian adaptive portfolio optimization for DC pension plans," Insurance: Mathematics and Economics, Elsevier, vol. 122(C), pages 262-274.
    10. Battocchio, Paolo & Menoncin, Francesco, 2004. "Optimal pension management in a stochastic framework," Insurance: Mathematics and Economics, Elsevier, vol. 34(1), pages 79-95, February.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Wang, Ling & Jia, Bowen, 2025. "Equilibrium investment strategies for a defined contribution pension plan with random risk aversion," Insurance: Mathematics and Economics, Elsevier, vol. 125(C).
    2. Zhiping Chen & Liyuan Wang & Ping Chen & Haixiang Yao, 2019. "Continuous-Time Mean–Variance Optimization For Defined Contribution Pension Funds With Regime-Switching," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 22(06), pages 1-33, September.
    3. Xiao Xu, 2020. "The optimal investment strategy of a DC pension plan under deposit loan spread and the O-U process," Papers 2005.10661, arXiv.org.
    4. Guan, Guohui & Liang, Zongxia, 2015. "Mean–variance efficiency of DC pension plan under stochastic interest rate and mean-reverting returns," Insurance: Mathematics and Economics, Elsevier, vol. 61(C), pages 99-109.
    5. Peng, Xingchun & Luo, Liuling, 2025. "Optimal investment strategy for DC pension with mean-weighted variance-CVaR criterion under partial information," Insurance: Mathematics and Economics, Elsevier, vol. 120(C), pages 302-324.
    6. Chen, Zheng & Li, Zhongfei & Zeng, Yan & Shen, Yang, 2025. "Dynamic derivative-based pension investment with stochastic volatility: A behavioral perspective," Insurance: Mathematics and Economics, Elsevier, vol. 125(C).
    7. Wanting He & Wenyuan Li & Yunran Wei, 2025. "Periodic evaluation of defined-contribution pension fund: A dynamic risk measure approach," Papers 2508.05241, arXiv.org.
    8. Guohui Guan & Zongxia Liang & Yi xia, 2021. "Optimal management of DC pension fund under relative performance ratio and VaR constraint," Papers 2103.04352, arXiv.org.
    9. Guan, Guohui & Liang, Zongxia & Xia, Yi, 2023. "Optimal management of DC pension fund under the relative performance ratio and VaR constraint," European Journal of Operational Research, Elsevier, vol. 305(2), pages 868-886.
    10. Mei-Ling Tang & Ting-Pin Wu & Ming-Chin Hung, 2022. "Optimal Pension Fund Management with Foreign Investment in a Stochastic Environment," Mathematics, MDPI, vol. 10(14), pages 1-21, July.
    11. Wang, Pei & Shen, Yang & Zhang, Ling & Kang, Yuxin, 2021. "Equilibrium investment strategy for a DC pension plan with learning about stock return predictability," Insurance: Mathematics and Economics, Elsevier, vol. 100(C), pages 384-407.
    12. Wang, Peiguang & Wang, Zihui & Wang, Wenli, 2024. "Modeling mispricing risk of defined contribution pension plan with a mean–variance criteria," The North American Journal of Economics and Finance, Elsevier, vol. 74(C).
    13. Henrique Ferreira Morici & Elena Vigna, 2025. "Optimal additional voluntary contribution in DC pension schemes to manage inadequacy risk," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 48(2), pages 1031-1063, December.
    14. Wu, Huiling & Zhang, Ling & Chen, Hua, 2015. "Nash equilibrium strategies for a defined contribution pension management," Insurance: Mathematics and Economics, Elsevier, vol. 62(C), pages 202-214.
    15. Sun, Jingyun & Li, Zhongfei & Zeng, Yan, 2016. "Precommitment and equilibrium investment strategies for defined contribution pension plans under a jump–diffusion model," Insurance: Mathematics and Economics, Elsevier, vol. 67(C), pages 158-172.
    16. Bian, Lihua & Li, Zhongfei & Yao, Haixiang, 2018. "Pre-commitment and equilibrium investment strategies for the DC pension plan with regime switching and a return of premiums clause," Insurance: Mathematics and Economics, Elsevier, vol. 81(C), pages 78-94.
    17. Henrique Ferreira Morici & Elena Vigna, 2023. "Optimal additional voluntary contribution in DC pension schemes to manage inadequacy risk," Carlo Alberto Notebooks 699 JEL Classification: C, Collegio Carlo Alberto.
    18. Calisto Guambe & Rodwell Kufakunesu & Gusti Van Zyl & Conrad Beyers, 2018. "Optimal asset allocation for a DC plan with partial information under inflation and mortality risks," Papers 1808.06337, arXiv.org, revised Aug 2018.
    19. Pengyu Wei & Charles Yang, 2023. "Optimal investment for defined-contribution pension plans under money illusion," Review of Quantitative Finance and Accounting, Springer, vol. 61(2), pages 729-753, August.
    20. Tang, Mei-Ling & Chen, Son-Nan & Lai, Gene C. & Wu, Ting-Pin, 2018. "Asset allocation for a DC pension fund under stochastic interest rates and inflation-protected guarantee," Insurance: Mathematics and Economics, Elsevier, vol. 78(C), pages 87-104.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:arx:papers:2608.04532. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: arXiv administrators (email available below). General contact details of provider: https://arxiv.org/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.