Bridge over ocean
1 January 2006 Financial Analysts Journal Volume 62, Issue 1

Human Capital, Asset Allocation, and Life Insurance

  1. Peng Chen, CFA
  2. Roger G. Ibbotson
  3. Moshe A. Milevsky
  4. Kevin X. Zhu

Financial planners and advisors increasingly recognize that human capital must be taken into account when building optimal portfolios for individual investors. But human capital is not simply another pre-endowed asset class; it contains a unique mortality risk in the form of the loss of future income and wages in the event of the wage earner's death. Life insurance hedges this mortality risk, so human capital affects both optimal asset allocation and demand for life insurance. Yet, historically, asset allocation and life insurance decisions have been analyzed separately. This article develops a unified framework based on human capital that enables individual investors to make these decisions jointly.

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