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

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

b. Suppose the owner of a life insurance polio,- has no other financial assets — the person's onlv other asset is "human capital," or lifetime earnings capacity. What is the correlation coefficient between returns on the insurance polio,' and returns on the policyholders human capital?

c. Life 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 in spite of negative expected returns.

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