A life insurance policy is a financial asset. The premiums paid represent the investments cost. a. How

Question:

A life insurance policy is a financial asset. The premiums paid represent the investment’s cost.

a. How would you calculate the expected return on a life insurance policy?

b. Suppose the owner of a life insurance policy has no other financial assets—the person’s only other asset is “human capital,” or lifetime earnings capacity. What is the correlation coefficient between returns on the insurance policy and returns on the policyholder’s human capital?

c. Insurance companies have to pay administrative costs and sales representatives’ commissions; hence, the expected rate of return on insurance premiums is generally low, or even negative. Use the portfolio concept to explain why people buy life insurance despite the negative expected returns.

Expected Return
The expected return is the profit or loss an investor anticipates on an investment that has known or anticipated rates of return (RoR). It is calculated by multiplying potential outcomes by the chances of them occurring and then totaling these... Portfolio
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...