#12 Risk management for individuals
can someone help me understand how the demand for life insurance is inversely related to the volatility of human capital.
i would think that volatile human capital would require a greater demand for life insurance…? but schweser questions say otherwise
The more certain and consistent the Human Capital is, the more of a huge loss it would be to wife or family of the person that earns it. The more need to insure that huge loss with life insurance.
May look to more vets around here for a more eloquent answer, but higher vol around HC implies a greater discount rate. PV your HC (holding all else equal but discount rate) and the person with the higher discount rate will have lower HC and–thus–lower need for life insurance than someone with same HC, low vol, and lower discount rate.
thank you both for your responses. it seemed counterintuitive to me at first. makes sense now.