Abstract
We extend the work of Milevsky et al., [Milevsky, M.A., Promislow, S.D., Young, V.R., 2005. Financial valuation of mortality risk via the instantaneous Sharpe ratio (preprint)] and Young, [Young, V.R., 2006. Pricing life insurance under stochastic mortality via the instantaneous Sharpe ratio (preprint)] by pricing life insurance and pure endowments together. We assume that the company issuing the life insurance and pure endowment contracts requires compensation for their mortality risk in the form of a pre-specified instantaneous Sharpe ratio. We show that the price P m , n for m life insurances and n pure endowments is less than the sum of the price P m , 0 for m life insurances and the price P 0 , n for n pure endowments. Thereby, pure endowment contracts serve as a hedge against the (stochastic) mortality risk inherent in life insurance, and vice versa.
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