HUMAN LIFE VALUE
Should You Buy Life Insurance? And, If So, How Much Life Insurance Should You Buy?
(The Story Of Your Human Life Value)
If I asked you how much you should insure your car or home for, you’d probably look at me like I had alligators crawling out my ears.
The answer is obvious: You insure those things for their full replacement value.
Well, the same idea applies when buying life insurance.
Enter, Human Life Value (HLV).
Let’s start with the basics, shall we?
Human Life Value is an objective measure of the economic value of your life.
It relies on a fundamental assumption. Namely, your life, as a productive human being, is valuable. That, in order to survive, you must produce an income. And, if your life or ability to produce an income is lost, that it can be replaced.
In other words, your life (and your ability to produce an income) is a value. Human Life Value tells you how much your productive ability (i.e. earning potential) is worth. Life insurance replaces it once it is lost.
But… in order for this to make any sense, you must place a high value on your own life and your ability to produce income for as long as you live.
If you do not place a high value on your life and income potential, you should not buy any amount of life insurance.
The HLV equation is purely mathematical, but the concept of Human Life Value is driven by your own unique story… your personal values, your chosen profession and career, and your commitment to increasing personal responsibility and improving your earning potential throughout your life.
Sounds serious, doesn’t it? Well, it is but… it’s also a remarkable story of your life and what that life is worth to you and those you care about.
So, before we get to the math, let’s get a better understanding of Human Life Value and then… let’s talk about you.
Ready? Then, let’s go…
What Is Human Life Value (HLV) And Why Does It Matter?
The undisputed heavyweight champion of life insurance education, Solomon Huebner.
He wrote the very first life insurance textbook in 1915, which later became the standard text for Chartered Life Underwriter students.
He also wrote the very first textbooks on the stock market, stock exchange, bonds, the bond market, organized commodity markets, and property insurance.
Huebner founded the American College in 1927 and the American Institute for Chartered Property Casualty Underwriters in 1942.
He was the emeritus professor of insurance at the University of Pennsylvania for 49 years and… taught an estimated 75,000 students the value of life insurance and the financial markets.
All modern texts and educational material on life insurance (and many other financial topics), including the economic value of human life, can be traced directly back to Huebner.
How Much Insurance Should You Buy? It Depends On Your Human Life Value (HLV)
Solomon Huebner, Ph.D., was widely recognized as the “father of insurance education”… inventing and defining the term “human life value,” which he defined (in his book The Economics Of Life Insurance) as:
…the monetary worth of the economic forces that are incorporated within our being, namely, our character and health, our training and experience, our personality and industry, our judgment and power of initiative, and our driving force to put across in tangible form the economic images of the mind.
In other words, you have a certain amount of earning potential. Maybe that earning potential is $50,000 per year or maybe it’s $100,000 per year or maybe it’s much, much more.
How are you even capable of earning this kind of money?
Human beings (which, presumably, includes you) are incredibly creative. And… we have this really cool ability to take what’s inside our mind and bring it into the real world through a combination of rational thought, initiative and action, and good judgment.
And then… we sell the things we make or help make (either in our own business or while working for someone else) for a profit, make money, and pursue more and more values to make more and more money.
This is true, even if you currently live on “property income” or “investment income.” This is income which is vulnerable to loss if the underlying asset (i.e. the business) craters or even goes through a tumultuous period and loses value (thus decreasing the amount of income you receive or decreasing the total value of the bonds you hold or your ownership in the business).
Regardless of your source of income, your earning potential is likely worth many millions of dollars over your entire lifetime. And… you can do all kinds of good and wonderful things with that money while you’re alive.
That’s the good news — you’re already primed to be a multi-millionaire with amazing potential and… you don’t even fully realize it yet.
The bad news is… your life is not guaranteed.
That may not be headline news, but it’s something a lot of people overlook, ignore, or minimize. You may die at any moment from just about any and every cause imaginable. Fortunately, your risk of dying young is really, really small… almost non-existent, really.
But… as you get older, your risk of dying increases until… it becomes an inescapable certainty and… you die. What happens between now and then is up to you. You can continually work to increase your earning potential and insure that potential or… you can let it go to waste.
If you die before you’ve realized your full earning potential then… your future earnings are lost forever. Your potential is lost forever.
Why Does Any Of This Matter?
It might not matter. It depends entirely on you and your own personal values.
Do you value your future income and earnings potential? Do you want to make this world a better place to live for you and those you care about while you’re alive? What about after you’re dead? If you don’t care about any of that, don’t buy life insurance.
If you do care about those things, then insure your life for its full economic value and figure out what kind of legacy you want to leave.
If you’re still having trouble wrapping your head around HLV, think of it like this: it is the total sum of money you could potentially earn over your entire lifetime, but have not (yet). In other words, it’s your total lifetime earning potential.
A great many risks await you in life. Those risks will start to chip away at your earning potential and… maybe even destroy it. The insurance exists to protect and preserve the value of that income (and, by extension, any money you save).
Now… what is that worth to you?
That is what Human Life Value can help you figure out. And… that is what my Human Life Calculator will show you.
xCalcHLV: An Interactive Human Life Value Calculator
How To Use This Calculator
This Human Life Value calculator will help you determine your total lifetime earning potential and also how much life insurance you should buy based on that potential. Select any green input field, highlight (or delete) the default numbers, and enter your own information.
When you’re finished with one input field, either tab to move to the next field or select the next field with your mouse. Do not press “Return” or “Enter” as this will not select a new input field. Press “Reset” at the bottom to reset all input fields.
Watch the video on the left for more information.
Your Human Life Value Story
Human Life Value… Beyond The Numbers
Now that you’ve messed around with the calculator, what do you do with all these numbers? It’s tempting to just plug in your income and whatnot and get “your number” and call it a day but… that’s not really what HLV is about.
Ultimately, your Human Life Value is a dollar amount that changes over time, based on your actual income, accrued assets, and certain long-term goals like… will you retire and if so at what age?
Human Life Value also implies (even though it is not explicit in the calculation) how much money you might need for your future — whether you retire or not.
Some potential uses for savings include:
- Funding short and long-term financial goals (e.g. buying a new car, starting a business, going back to college, going on vacation, buying investments)
- Retiring — an obvious choice for some folks but an involuntary condition for others who get sick or are disabled and can’t work in their old age.
- Giving your future self a raise — this one is super-important for women who tend to experience a slight decrease in income as they get older. But even men sometimes see their income drop off after about 65 or 70 years of age. Some companies don’t want to promote someone beyond this age and some business owners go through a transition phase where ownership changes hands and income for the former owner (i.e. you) flattens out or maybe decreases. A guaranteed raise funded through your savings nullifies this problem.
- Medical expenses — this is an unfortunate reality of getting older. And, medical problems tend to be quite expensive the older you get.
- Unexpected expenses — life doesn’t stop just because you retire or grow old. Cars still break down, roofs sag and leak, and water heaters still break… and they do it at the most inconvenient time.
The amount of savings you need is driven almost entirely by your own personal values, goals, wishes, and future expectations. Maybe the only exceptions are things like medical bills, which are more or less necessary expenses.
So… what do you want to do with your life now and far into the future?
What are your most important personal values (these are generally things, people, or ideas that take top priority in your life and that you would like to devote more time and money to)? What would you like to spend more time doing, but don’t feel you can right now?
Your biggest financial fears?
What are you most confident about in your life right now?
Assuming your family is well provided for, what non-profits, foundations, scientific or research organizations, or other charitable causes do you want to leave money to after your death?
Based on your Human Life Value (calculated above), do you want to make more money during your lifetime than what you’re projected to make? And, if so, how much more money do you want to make during your life? What do you think you’re worth and do you want to do what it takes to realize your potential?
What’s the biggest financial problem or challenge in your life that you’re ready and motivated to solve right now?
Write down the answers to these questions and start outlining some of this stuff you want to accomplish but, for whatever reason, have not.
Drill down into the specifics. For example, if you’ve listed out your personal values and interests, ask yourself why these things are so important to you. Why aren’t other things more important than these things you’ve listed? Is there anything that might knock one of these things off the list and if so, what is it?
Now… what specific tasks do you need to do in order to accomplish these goals?
Now… what would happen to you, and how would you feel, if you did not achieve your financial goals?
Try to construct a story about yourself, how you view yourself, what you envision for the future, and how you might get there. Then, list all the things you can think of which might get in your way, frustrate your personal interests, or prevent you from accomplishing your goals.
Write all of this information down and save it. You’ll be using it elsewhere in this guide.
Needs Analysis And The Theory Of Decreasing Responsibility
One thing you’ll notice from the calculator above, and from your Human Life Value story, is your absolute need for life insurance is higher than what many life insurance agents, financial planners, and websites will tell you to buy.
Many financial planners and insurance agents still base their life insurance recommendations on a sales and marketing concept called “needs analysis.” Needs analysis is based on the idea that the right amount of life insurance is an amount of money (capital) which your family needs after you die.
The basic approach to calculating your life insurance needs is to write down an objective, write down the present value of your existing assets (cash, investments, home, etc.), and then figure out the gap between what your family (or business partners) might need and what you currently have.
The idea is based on the (often) unstated premise that your value as a human being lies primarily in what you can provide to your dependents — hence the “need” for life insurance.
“Need,” in this context, is somewhat arbitrary. Do you (and by extension your family or business partners) “need” a $100,000 per year income? Perhaps you can get by on less? Maybe $50,000? Maybe $20,000? Maybe less than that? Do you really need to live in such a big house? Maybe your spouse can live in a hotel after you die? Who is to say how much you absolutely need? Who is to say what your family needs?
How are we defining “need”? And that is the problem. Need is never defined very well and in most cases is somewhat arbitrary. Sometimes, it is defined as the amount of money necessary to pay off all debts after you die. Other times, it is defined as an amount of money your family needs to live on until your spouse retires or your kids move out of the house.
But… once again, what is “necessary” and what isn’t? And more importantly, why does your family need this much and not a different amount?
Does your family really need money immediately to pay off debts? Can’t your spouse get another job to pay off those debts? What about your kids? Do they really need money for college? Can’t they take on student loans or get financial aid? These questions are never really answered by the needs analysis approach.
Also implicit in some of the calculations and assumptions is the idea that you can over-insure your life and that life insures may be willing to sell you too much life insurance, causing you to overpay for coverage you don’t need. Because of this, needs analysis calculations attempt to find the “right” insurance amount, which shouldn’t be “too much” nor “too little.”
The modern version of Needs Analysis is based on a very scientific-sounding theory of personal finance which has “evolved” over the years, called the Theory Of Decreasing Responsibility. The Theory of Decreasing Responsibility states that financial responsibilities rise when you’re young and decline when you’re older, and your life insurance coverage should reflect that.
Mostly, your need for life insurance is explained as a generalized argument centered around your personal responsibility or obligation to your family and loved ones, which generally decreases as you get older. In some sales concepts using this method, the focus is on your duty to your family or business partners, and the purchase of a policy is your ticket to a guilt-free conscience. Though, few advisors frame it this way, explicitly. Instead, the idea of duty and guilt is merely implicit.
Once you have no dependents, no debts, and few or no liabilities, the proponents of Needs Analysis will tell you that you have no need for life insurance.
It sounds sensible and logical.
And it is wholly untrue.
Human Life Value And The Theory Of Increasing Responsibility
Needs analysis crumbles under careful scrutiny because its basic premise is incorrect. Namely, that your family’s needs after your death can be accurately predicted and quantified.
They cannot because the standard of value by which this is being measured against is wrong.
Needs analysis suffers from several major flaws:
- It does not explicitly acknowledge your economic value as an individual. does not account for other financial planning goals, and does not consider the impact of risk capacity. Risk capacity is how much money you can objectively afford to risk or lose. For example, needs analysis does not account for the need to have an adequate amount of income in the future (either for retirement or for some other purpose while you’re still alive), and it does not make adjustments for the risk of loss of personal savings before it is needed. This usually creates a distorted view of your financial situation and also creates a “lopsided” financial plan during various periods of your life. This lopsided plan creates a situation where your spouse or dependent has a better standard of living if you die than if you live. In situations where a substantial amount of savings has been accumulated, and a substantial amount of term insurance is in-force, you are essentially worth more dead than alive. This is the very problem of “overinsurance” that needs analysis purports to solve. And yet, when the term policy eventually expires, you suddenly have less insurance (and savings) than what you’re really worth and, by extension, less insurance than your beneficiaries need or want.
- It does not account for other financial planning goals.
- It does not consider the impact of risk capacity. Risk capacity is how much money you can objectively afford to risk or lose or how much risk you must take to achieve your goals. Needs analysis does not account for the need to have an adequate amount of income in the future (either for retirement or for some other purpose while you’re still alive), and it does not make adjustments for the risk of loss of personal savings before it is needed. This usually creates a distorted view of your financial situation and also creates a “lopsided” financial plan during various periods of your life. This lopsided plan creates a situation where your spouse or dependent has a better standard of living if you die than if you live. In situations where a substantial amount of savings has been accumulated, and a substantial amount of term insurance is in-force, you are essentially worth more dead than alive. This is the very problem of “overinsurance” that needs analysis purports to solve. And yet, when the term policy eventually expires, you suddenly have less insurance (and savings) than what you’re really worth.
- Needs analysis is generally based on deterministic assumptions instead of stochastic ones. In other words, it does not consider risk (i.e. the probability of failure). It only assumes everything will work exactly as planned, which is rare. Deterministic modeling creates an illusion of precision — a very scientific looking, but logically (and practically) flawed assessment. In many cases, needs analysis will understate the amount of money your dependents or beneficiaries need or want, or will make unreasonable probabilistic assumptions about the growth and appreciation of your current savings and assets, and thus you are left under-insured.
These flaws arise from the moral and practical problem of setting others’ arbitrary needs as the standard by which you should measure the value of your own life. Any calculation based on this assumption is necessarily arbitrary and non-objective.
Where Needs Analysis assumes your life acquires value in relation to other people (even if those people are your family), a proper and intellectually honest understanding of Human Life Value starts with the assumption that your life is (economically) valuable. That the primary value is your own life, not someone else’s.
Once again, life insurance, like all other forms of insurance, replace that which is lost. But to know what is lost, one must define the objective value of the thing being insured. In this case, the value of your life.
To do this, your life must be the primary value in this equation.
After all, if your life is not the primary value here, what is it that you’re insuring? And, what value could life insurance really have? Remember, the person insured in the contract is you. Your beneficiaries are people who benefit only after you’re dead. They are, by definition, a secondary concern so long as you are still alive.
It’s true that others may rely on you and benefit from your work. In fact, this true for most people. And, it’s part of the reason why people buy life insurance — because they have dependents who will be financially ruined when they die.
But, even without dependents, individuals have value based on the virtue of their own productiveness and the value of their productive work… work that results in income… income which is earned by the values they produce and freely and voluntarily trade with others.
In the words of writer and philosopher Ayn Rand,
The virtue of Productiveness is the recognition of the fact that productive work is the process by which man’s mind sustains his life, the process that sets man free of the necessity to adjust himself to his background, as all animals do, and gives him the power to adjust his background to himself. Productive work is the road of man’s unlimited achievement and calls upon the highest attributes of his character: his creative ability, his ambitiousness, his self-assertiveness, his refusal to bear uncontested disasters, his dedication to the goal of reshaping the earth in the image of his values. “Productive work” does not mean the unfocused performance of the motions of some job. It means the consciously chosen pursuit of a productive career, in any line of rational endeavor, great or modest, on any level of ability. It is not the degree of a man’s ability nor the scale of his work that is ethically relevant here, but the fullest and most purposeful use of his mind.
It is the “creative ability… ambitiousness… self-assertiveness… refusal to bear uncontested disasters… dedication to the goal of reshaping the earth in the image of his values…” which you are protecting when you buy life insurance… it is the recognition that your life has value and that that value is worth protecting against the many and varied uncertainties in life.
And that income is the practical proof of your productive work done and evidence of your mind’s ability to transform Rand’s “creative ability… ambitiousness… self-assertiveness… refusal to bear uncontested disasters… dedication to the goal of reshaping the earth…” and Huebner’s “economic images of the mind” into tangible reality… which is why Human Life Value includes single individuals as well as married, young as well as old, those with and without children.
Everyone is capable of being productive and thus everyone has potential value worth insuring.
To restate, every rational, productive, individual has a calculable economic value… a value which can be destroyed and thus… a value which can be insured for its own sake. The life insurance policy replaces the economic value of that individual (though obviously not their physical, spiritual, or psychological value).
You are the primary beneficiary of your productive work and money while you’re alive. You eat, pay rent or a mortgage, buy cars, buy recreational vehicles, buy computers, buy phones, buy clothing, buy televisions, go on vacations, and so on… for your own benefit, survival, and enjoyment.
But, other people are beneficiaries of your work (and money) too — secondary beneficiaries.
These people become the named primary beneficiaries on your insurance policy. These are individuals or organizations, which benefit from you being alive (not dead). Because they benefit from your productive work while you’re alive, they suffer a real economic loss when you die… which is why you buy life insurance — you genuinely care about these people or organizations, and their welfare. They matter to you. You value them.
Again, if you are the type of individual who is concerned about achieving your financial goals, protecting and preserving your most cherished personal values, and with making the world a better place to live for yourself while you’re alive and for your beneficiaries after you’re dead, then life insurance is a cost-effective, and highly rational, purchase.
About those decreasing responsibilities. The Theory Of Decreasing Responsibility argues that your responsibilities decrease with age. It also assumes you can be “over-insured.” This is unequivocally false on both accounts.
First of all, a life insurance company will never, under any circumstance, knowingly over-insure you. The reason is simple: there is no profit in selling you too much life insurance. Insurance companies must manage risk to stay profitable, and those risks (i.e. life insurance death benefits) cost money, and… selling you too much insurance creates excess risk that they cannot afford to take. Each death benefit payout costs the insurer money. In essence, the insurer’s job is to take on risk but… not catastrophic risks (catastrophic to the insurer).
This is why an insurance company will never sell $20 billion of life insurance to an individual with an annual income of $50,000. Even if the policyholder could somehow afford the premiums, the insurer doesn’t want to insure someone for $20 billion whose objective economic value is only $50,000 per year. More to the point, someone earning $50,000 per year cannot afford a $20 billion policy and… it’s incredibly difficult and expensive for an insurance company to secure those kinds of guarantees. So, they want to make sure the policyholder can afford to pay for the policy (and thus, the transfer of risk to the insurer).
Secondly, it’s true that your children (if you have them) move out of the house, eventually. You may pay off your mortgage. You may pay off all or most of your debts, but… other responsibilities come into your life to replace the responsibilities you took on when you were younger (and which you are subsequently relieved of as you grow older).
For example, as you get older, you take on the massive responsibility of providing your own income for your retirement. This is not a simple matter. You must “switch gears” as it were… taking on the task of managing your own savings or paying someone to help you manage your savings. Even in the latter case, no one can truly manage your money for you completely without your input or approval. This is a responsibility you never get rid of and which grows over time until you die. The risk of running out of savings before you die also grows as you age, which is why life insurance companies exist — to help shift the financial risk away from you while you still retain the responsibility of maintaining your day-to-day affairs. In other words, you still have the responsibilities of maintaining a home and a household and an automobile… and so on. And, the perceived effort of these responsibilities may increase as you age and your cognitive abilities decline.
You also take on the responsibility of making sure your long-term care needs are paid for if you need to be placed in a nursing home. You take on the responsibility of your own healthcare and medical expenses which, as you age, become increasingly expensive. Your final expenses are also your responsibility.
But, even aside from the obvious, there are other responsibilities that you may choose to take on, and which may enhance your life. Generally speaking, most people find that their life acquires more meaning as they take on more responsibility, regardless of age. Conversely, their life is stripped of meaning and value when they shed responsibilities.
This becomes especially important as you get older. The more legitimate responsibilities you take on, the more meaningful your life is. The more productive work you engage in, the more meaningful your life is.
Someone who has literally no responsibilities and does no productive work to sustain themselves is either a ward of the state or is totally dependent on someone else for survival. Either way, that person is not long for this world.
Human Life Value accounts for the fact that individuals can potentially remain productive for their entire life. As such, they are always at risk of losing that productive capacity. There is always a potential for loss of income and assets. Additionally, known or expected future expenses must be matched with known or expected future savings — something life insurance can guarantee but which investments (and other assets) cannot.
And, since you can never know exactly when you will die, there is always a need for life insurance for those who continue to take on more and more responsibilities as they age, those accumulating more and more known future expenses, and also for those who choose to remain productive until their final days.
The life insurance, of course, pays off any financial obligations associated with those responsibilities when you die, and then it makes your beneficiaries whole for their loss. Depending on the policy and design, it may also provide guaranteed savings for medical (and other) expenses you incur while you’re still alive.
If not, then review this section again.
If so, then explore other sections of this guide.
Want To Learn More?
If you’re ready to learn more about life insurance and how it can improve your financial plan, then click the link below and explore more sections of this guide.