Abstract
This paper considers an optimal life insurance for a household subject to mortality risk. The household receives wage income continuously, which could be terminated by unexpected premature loss of earning power. In order to hedge the risk of losing income stream, the household enters a life insurance contract. The household may also invest their wealth into a financial market. Therefore, the problem is to determine an optimal insurance/investment/consumption strategy. To reflect a real-life situation better, we consider an incomplete market where the household cannot trade insurance contracts continuously. We provide explicit solutions in a fairly general setup.
Highlights
We consider a household whose income stream relies on one particular member of the family
This paper considers an optimal life insurance for a household subject to mortality risk
In order to hedge the risk of losing income stream, the household enters a life insurance contract
Summary
Under the condition, provided that insurance benefit is a linear function of n, the household shall invest all the initial endowment either in the insurance contract or in the financial market, depending on the relationship between the insurance premium and the expected discount value of insurance benefit. This is natural because the financial market excluding insurance contracts is complete, if these two quantities are not equal, the household takes a full advantage of possible mispricing in the insurance contract.
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
