Question 2 (13 Marks) Consider the impact of human capital on financial planning. You come across the following types of insurance:

• Life Insurance, which pays out a lump sum benefit in the event of the death of the insured.

• Total Disability Insurance, which pays out a lump sum benefit when the insured becomes totally and permanently disabled so he/she cannot work.

• Income Protection Insurance, which pays out benefits for periods when the insured lose his/her job.

(a) 3 Marks. Describe the key features of human capital risk.

(b) 6 Marks. Discuss how each of the above insurance can be used to reduce risk and what key factors drive the demand for each insurance.

(c) 4 Marks. In Australia, most individuals have default life insurance purchased through their superannuation funds, though they can choose to opt out. Some people argue that the default insurance premiums can substantially reduce one's savings at retirement, especially for the young. What is your view on the role of life insurance in retirement planning? Justify your answer. (Note that there is no right or wrong answer for this question, but the grades will depend on how clearly you state your view and how well you justify your answer.)