Life Insurance Quiz Insurance, insurance, average, initial, demand

Chuckrox8

Tucker is 35, has average initial wealth, and has labor income that is highly correlated with the stock market.

Max is 35, has average initial wealth, and has labor income that has very low correlation with the stock market.

All else being equal, who has the greater optimal demand for life insurance, Tucker or Max?

mp3bu

If an investor has a more demand on Life Insurance, can he also increase his allocation to risky asset?

Unforseen

The logic seems to be ... the more you have to protect the higher the demand for life insurance.

Roflnadal

CORRECTION: The more human capital you have to protect, the higher the demand for life insurance.

pennyless

Max is the correct answer.

Check out Vol 2, p340.

re: CP, I hear where you're coming from on the terminology, but that's what the CFAI uses.

jmh530

I guess answer depends on what OP meant by Optimal? More or less???

CP

susana

Well put darlia. Don't try to find a justification, just use the PV approach. You could argue that both Tucker and Max need enough life insurance to meet their minimum expenses. Max has high earnings volatility, which means his family has the ability to live on low earnings. Tucker has lower earnings volatility, so his family is used to getting the same (median amount) of earnings. Therefore their minimum standard of living is higher. By that logic, he needs more life insurance for them to live normally.

It's a flawed argument, but it's the best I can do. Hence, just stick with the PV approach with a higher discount rate.



Edited 1 time(s). Last edit at Monday, May 16, 2011 at 11:42PM by sbmarti2.

skycfa

Where do they come up with this nonsense?

nannan66

The right answer, the wrong answer, the CFA answer.

lcai

Max for the win