Human capital volatility and life insurance

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sunman9

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CFA material suggests increased volatility in Human Capital leads to less demand for life insurance.
I understand that if you have the potential for more upside (ie your comp is tied to equity returns of a public company or something similar) then it makes sense.
However, volatility can imply downside as well? - in that case shouldnt the demand for life insurance be greater?
 
HIgher volatility, higher standard deviation, lower PVHC, lower demand for life insurance.
Thank you sequential logic.
 
MrSmart wrote:
HIgher volatility, higher standard deviation, lower PVHC, lower demand for life insurance.
Thank you sequential logic.
Click to expand...
MrSmart - I was under the impression that the lower your HC, the lower the need for life insurance as that is the capital type you’re protecting against by purchasing life insurance.
 
That’s what he wrote.
Lower PVHC = Lower present value of human capital.
 
“Another way to think about these results is to consider the certainty (or utility) equivalent of risky human capital, which can be thought of as the economic present value of a cash flow stream. The higher the correlation with other financial assets and the higher the volatility of the cash flow stream, the lower the certainty equivalent value and, therefore, the lower the demand for insurance” - page 411.
My understanding is that: as it’s obvious that the more uncertain your wealth (both financial capital and human capital), the higher your allocation to risk-free asset, going further - the higher your allocation to risk-free asset, the lower your demand for life insurance should be.
 
citykris wrote:
“Another way to think about these results is to consider the certainty (or utility) equivalent of risky human capital, which can be thought of as the economic present value of a cash flow stream. The higher the correlation with other financial assets and the higher the volatility of the cash flow stream, the lower the certainty equivalent value and, therefore, the lower the demand for insurance” - page 411.
My understanding is that: as it’s obvious that the more uncertain your wealth (both financial capital and human capital), the higher your allocation to risk-free asset, going further - the higher your allocation to risk-free asset, the lower your demand for life insurance should be.
Click to expand...
Not directy.
Human capital dies, financial capital doesn’t. The more cheap HC is, the less you need LI.
 
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