RT Journal Article SR Electronic T1 Optimizing Portfolios with Allocations to Insured
Death Benefit: A Proposed Methodology
for Evaluation JF The Journal of Investing FD Institutional Investor Journals SP 16 OP 27 DO 10.3905/joi.2014.23.2.016 VO 23 IS 2 A1 Robert G. Danielsen A1 Sergey S. Barabanov A1 John Schweers A1 Michael F. Sullivan YR 2014 UL https://pm-research.com/content/23/2/16.abstract AB In this article, the authors 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 been used often 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, the authors 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.TOPICS: Portfolio construction, wealth management, simulations