Investments and Life Insurance are not independent decisions

SSRN-Human Capital, Asset Allocation, and Life Insurance by Roger Ibbotson, Peng Chen, Moshe Milevsky, Xingnong Zhu: "Human Capital, Asset Allocation, and Life Insurance"

Executive Summary (Don't you think that sounds better than abstract?)
You should look at life insurance as another asset in your portfolio.


Ibbotson, Chen, Milevsky, and Zhu tell us that we can not make investment and life insurance decisions independently.

In the authors' words:

"Life insurance has long been used to hedge against mortality risk. Typically, the greater the value of human capital, the more life insurance the family demands. Intuitively, human capital not only affects the optimal asset allocation, but also the optimal life insurance demand. However, these two important financial decisions—the demand for life insurance and the optimal asset allocation—have consistently been analyzed separately in theory and practice."

and later

"We develop a unified model to provide practical guidelines for developing the optimal asset allocation and life insurance decisions for individual investors in their pre-retirement years (accumulation stage)."

Chart 1 (which I can not copy) is an excellent visual description.


Cite:
Ibbotson, Roger G., Chen, Peng, Milevsky, Moshe Arye and Zhu, Xingnong, "Human Capital, Asset Allocation, and Life Insurance" (May 2005). Yale ICF Working Paper No. 05-11. http://ssrn.com/abstract=723167