Optimal consumption, investment, and life insurance purchase: a state-dependent utilities approach

Abstract

We consider the problem of an individual who has to make decisions (under uncertainty) about optimal consumption, investment, and life insurance purchase in a financial market with a finite number of securities; the role of the life insurance is to protect the individual's family of an eventually early death. We propose facing the problem of optimal election under the alternative approach of state-dependent utilities; so we assume that preferences measure the agent's satisfaction for future cash flows valued by the market when the individual is making his/her decisions.

Keywords:

• Optimal choice
• life insurance
• state-dependent utility

2010 Mathematics Subject Classification:

• 91G80

Acknowledgments

The authors would like to thank two anonymous referees for their very careful reading of the paper. Also, the authors thank participants at the Third International Conference on Computational Finance for their useful comments, especially Dr Mogens Steffensen from the University of Copenhagen. Finally, Fabio Gómez acknowledges the financial support from the Doctorados Nacionales – COLCIENCIAS program.

Disclosure statement

No potential conflict of interest was reported by the author(s).