Life insurance in a portfolio context

The ownership of life insurance may be modeled as a portfolio problem in which the return on the life insurance contract is negatively correlated with the return on a claim to future wage income. The mean-variance model developed in the paper uses such a framework to express the optimal amount of insurance in terms of two components: the expected value of the wage claim and the risk/return characteristics of the insurance contract. The model thus offers an appealing way to formulate the life insurance problem in a portfolio context. Implications of the model for the functioning of a life insurance market are examined and the existence of accidental death contracts is explained.