One way that life insurance firms can hedge the risk created by offering whole life insurance policies by ________________.

Question

Quizplus · Accepted Answer

Holding long term bonds can help life insurance firms hedge the risk created by offering whole life insurance policies, as the cash flows from the bonds can be used to pay out death benefits and endowments. The relatively low risk associated with bonds also makes them a good choice for balancing out the risk inherent in life insurance policies. Holding equities would expose the firms to more risk and is not as effective for hedging purposes. Holding short term bonds may not provide enough of a return, and exercising the right to terminate policies would result in lost revenue for the firm.

One Way That Life Insurance Firms Can Hedge the Risk