Portfolio Choice and Life Insurance: The CRRA Case

Huaxiong Huang, Moshe Milevsky and Jin Wang

Journal of Risk & Insurance, 2008, vol. 75, issue 4, 847-872

Abstract: We solve a portfolio choice problem that includes life insurance and labor income under constant relative risk aversion (CRRA) preferences. We focus on the correlation between the dynamics of human capital and financial capital and model the utility of the family as opposed to separating consumption and bequest. We simplify the underlying Hamilton–Jacobi–Bellman equation using a similarity reduction technique that leads to an efficient numerical solution. Households for whom shocks to human capital are negatively correlated with shocks to financial capital should own more life insurance with greater equity/stock exposure. Life insurance hedges human capital and is insensitive to the family's risk aversion, consistent with practitioner guidance.

Date: 2008
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https://doi.org/10.1111/j.1539-6975.2008.00288.x

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Persistent link: https://EconPapers.repec.org/RePEc:bla:jrinsu:v:75:y:2008:i:4:p:847-872

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