Title

Optimizing Portfolios with Allocations to Insured Death Benefit: A Proposed Methodology for Evaluation

Department/School

Finance

Date of this version

2014

Document Type

Article

Keywords

Portfolio optimization, portfolio allocation, life insurance, death benefit, methodology.

Abstract

We articulate a new solution to the unique problem of merging actuarial concepts like mortality probability with traditional portfolio and investment concepts like mean/variance analysis in the context of assessing the use of insured death benefit to optimize the risk-adjusted returns of a portfolio. The uncertain duration of cash flows and timing of death benefits have historically made it difficult for researchers to treat life insurance as an asset class in portfolio optimization or allocation. Yet, various life insurance products have often been used in institutional and corporate strategies, as well as in high net worth individual and family portfolios, usually with a poor quantitative sense of the optimal level of life insurance. Using Monte Carlo simulations and actuarial techniques, we propose a method that allows an analysis of the benefits and costs of insured death benefit to long-term portfolio returns and volatility. The conclusion is that portfolios with insured death benefit can potentially yield significantly better risk-adjusted returns and future values.

Published in

Journal of Investing

Citation/Other Information

23(2), 16-27