Human Life Value: Determining How Much Life Insurance To Buy

Human Life Value Basics

If I asked you how much you should insure your car or home for, you would instantly know how much to buy——enough to cover the value of the home.

The same thing applies to all other property insurance, from automobiles to business property——you buy enough insurance to cover the value of the property. 

Well, the same idea applies when buying life insurance.

Enter, Human Life Value (HLV).

Most folks don't think of their life as a piece of property. And, while others do not own you, the fact is... you own yourself.

Human Life Value rests on the premise that all property values in existence are created by individuals. And, because of this, the productive effort required to make every man-made product and service is insurable against loss. This is in direct opposition to the modern concept of "needs analysis" that dominates the financial planning and life insurance industry.

xCalcHLV: An Interactive Human Life Value Calculator

This human life value calculator gives you a quick assessment of how much life insurance it takes to fully insure your life against loss. It incorporates the principles of Dr. Solomon Huebner's original idea of Human Life Value. The video below is a quick tutorial on how to use the calculator below.

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.

What Is Human Life Value (HLV) And Why Does It Matter?

Solomon Huebner, Ph.D., was widely recognized as the “father of insurance education”, and created the gold standard for measuring an individual's lifetime insurable amount: Human Life Value.

Huebner organized his theory against the prevailing wisdom of the time (which at that time held no firm, objective, standard for measuring the value being insured by life insurance). 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 Dr. Huebner.

... including the concept of 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.

Central to the idea of any insurance policy is the fact that the life being insured has economic and personal value, which is at risk of being lost, damaged, or destroyed. Thus, the purpose of the insurance is to replace the economic value of that which is lost, damaged, or destroyed. In the case home owner's insurance, for example, the thing being insured is the home. What needs to be known is the value of the home. In the case of automobile insurance, what needs to be known is the value of the vehicle being insured. And, in the case of life insurance, what needs to be known is the value of the human life being insured.

This naturally raises the question:

What Is The Economic Value Of A Human Being's Life? 

Mathematically, Human Life Value can be reduced to the present value of all future income streams. Some variations on this calculation might make an adjustment for already existing or already accumulated assets.

But, the basic idea is the same, which is to account for the total lifetime productive potential, or earning capacity, of an individual. That lifetime earning potential represents the total lifetime economic value of an individual. The "economic universe" of an individual, then, is limited to the amount of income, and subsequent wealth, a person can produce. All expenses and savings are based on that income. Thus, an individual is worth no more, and no less, than their ability to produce values for others in exchange for an income. In some rare circumstances, a person creates value without receiving a formal income, as is the case with stay-at-home parents. Nonetheless, these stay-at-home parents (or other caregivers) earn an implicit income derived from the values they produce, and are either explicitly or implicitly paid out of the salary of the other spouse or wage/salary earners.

By definition, an individual cannot be worth more than the values they produce, and thus the income they receive. Likewise, they cannot be worth less than the values they produce. This is the meaning of "earning money". And, it is the fact that one earns one's own income and wealth that gives rise to the idea that one's earning capacity can be diminished or lost in some way, and thus that loss can be insured against.

Suppose 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? Simple. 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).

Despite the gradual, insane, and nonsensical mangling of Huebner's original message (in some cases by his own peers and students), and despite some of Huebner's later contradictions and inconsistencies, Human Life Value is (and has always been), fundamentally, about the economic value of human life and its relationship to productive work.

Where needs analysis quietly 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 premise that your life is economically valuable because you are a productive human being. That is a paradigm shift for most people today. We are often taught to place other’s needs, wants, and desires as the standard to reach for, instead of setting ourselves, our own sacred life, as the standard by which we judge our actions.

Your "personality and industry," your "judgment and power of initiative," and your "driving force to put across in tangible form the economic images of the mind" is what is of primary importance. The primary value here is your own life, not someone else’s, no matter who they are. After all, if your life is not the primary value here, why are you insuring it? And, what value could life insurance really have? And what, exactly is your beneficiary receiving if not your future economic value as a human being? What loss is being replaced and what are they being made whole for? Again, the person insured in the contract is you, not someone else. 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 of 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.

And... income (and thus value) which can be lost.

The writer and philosopher Ayn Rand wrote extensively on the value of productive work and its philosophical meaning:

“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—and more specifically, your productive potential—is valuable and worth protecting against the many and varied uncertainties in life. It is the recognition that income is the practical proof of your productive work and evidence of your mind’s ability to transform “creative ability… ambitiousness… self-assertiveness… refusal to bear uncontested disasters… dedication to the goal of reshaping the earth…” and those “economic images of the mind” into tangible reality. 

The fact that you can lose your income, or that your economic potential can be cut short by illness, disability, old age or death, is what makes Human Life Value and life insurance so powerful... it protects your future earning potential from being lost. It creates certainty out of uncertainty. 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 against loss. The loss, of course, is often directly experienced by a spouse, children, siblings, business partners, non-profits or charities that are beneficiaries of your earning capacity while you're still alive. You, of course, suffer the ultimate loss of everything as far as you're concerned — you literally lose your entire life.

How important that loss is to you is the subtle, often unstated, driving factor determining how much life insurance you will ultimately buy.

Human Life Value Vs. Needs Analysis: You vs "Others"

There are two basic reasons why you might buy life insurance. You are either buying it primarily for yourself (i.e. based on your own value as a human being) or you're buying primarily for the sake of others (i.e. others "need" your money). 

Your motivation cannot be primarily both. Primarily, the focus is either on yourself, and the value of your life, or it's on others and their needs.

While many financial planners and insurance agents extol the benefits of buying life insurance, they rarely explain its direct value to you much less the value of your own life. Instead, they tell you about your “need” for life insurance coverage and how it benefits your family when you die. The primary focus is on other people's needs. In many sales presentations, the purchase of life insurance is tied directly into a sense of duty, not value. And, if you don't purchase life insurance? Guilt. Perhaps you can hear the insurance salesman ask you from across the table: "You do care about your spouse and kids... don't you?"

Of course you do, so you concede the point and listen to what the agent has to say. Then, the fun begins. To calculate the amount of life insurance a person should own, most financial planners and insurance agents use something called “needs analysis” or “capital needs analysis.”

Needs analysis is based on the idea that the right amount of life insurance is an amount of capital (savings) your family needs after you die. Implicit in this idea is that your beneficiary's need can be (and often is) something different from your value as a human being, since the concept of Human Life Value in life insurance already addresses that issue (more on that in a moment).

Proponents of needs analysis base their life insurance recommendations on the often unstated premise that your value as a human being lies primarily in what you can (or must) provide to your dependents when you die. If you have no dependents, they argue, then you have no need for life insurance. Also implicit in some of the calculations and assumptions is the idea that you can over-insure your life and that life insurance agents might sell you too much life insurance, causing you to overpay for coverage you don’t "need". Because of this, some financial planners and insurance agents attempt to find the “right” insurance amount, which shouldn’t be “too much” nor “too little.”

Yet another common assumption, which goes hand-in-hand with needs analysis is the idea that you have more responsibilities when you’re young and starting a family and fewer when you’re old. Your kids eventually move out of the house, and your need for life insurance is said to decrease at this point since they are no longer dependent on you and thus you owe them very little, if anything at all. Plus, your mortgage (and presumably other debts) are paid off when you retire and you have fewer financial responsibilities. This theory, called 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.

Once you have no dependents, no debts, and few or no liabilities, the proponents of The Theory of Decreasing Responsibility and needs analysis tell you that you have no further need for life insurance. Supporters of these ideas often cite classic sales texts by A.L. Williams and Primerica, and popular financial gurus like Suze Orman and Dave Ramsey, or one of several studies, including a newer study by Browning, Guo, Cheng, and Finke (Spending in Retirement: Determining the Consumption Gap) and the infamous “Retirement Spending Smile” which purports to show that retirees spend less in retirement and thus need less income, which insurance experts would take to mean they have little or no need for life insurance.

The assumption made by pundits, some financial experts, radio and T.V. personalities, some investment advisors, and some insurance agents is that retirees have fewer financial responsibilities, spend less money because of changing priorities, and thus just plain don’t have a need for life insurance. This is all good news for those promoting needs analysis and The Theory of Decreasing Responsibility.

But, is it good news for the insured policyholder?

In theory and in practice, the simple answer is no. A policyholder is well-served by buying a permanent life insurance policy and holding it throughout their entire life until they die, or until they want to liquidate it for income or for some other great financial need or purpose. Unlike term life insurance, whole life insurance (and some other forms of permanent life insurance) have a duel purpose: to protect against loss and to assist in producing new wealth (which can then be insured against loss).

Needs Analysis In Practice

OK, but what about the critic's claims regarding lower spending levels, and decreasing responsibilities? Even if we assumed that the basic premise of The Theory Of Decreasing Responsibility held at least some water, do the facts and available research back up the claim that peoples responsibilities necessarily decrease with age?

If the premise is true, then someone ought to tell seniors their debt woes are “all in their head” and that their financial responsibilities have actually decreased with age. It’s true that many seniors try to spend less money over time, and the “Retirement Spending Smile" does show a steady decline in spending of 1%-2% per year but then… the “smile” kicks in and retirees start spending more in the latter years of their life… especially after age 85. And, in fact, the spending pattern appears to rise back to age-65 spending levels and beyond in some models and interpretations of the data.

This baffles financial planners, which is precisely why it doesn’t baffle seniors. Some research done by BlackRock Retirement Institute sheds light on this mystery. After almost 20 years of retirement, most seniors still had 80% of the money they had when they first retired (adjusted for inflation) while one-third of them had increased their net worth. A similar study done by Vanguard in 2015 showed that seniors with at least $100,000 in assets reinvested roughly 40% of the money they withdrew from retirement accounts. 

In other words, people do reduce consumption but they do it in favor of continued saving.

OK but what about their income?

Using publicly-available income tax data from the IRS, Andrew Biggs, of the American Enterprise Institute, demonstrated that so long as people save, retirees have incomes comparable to their younger working-age counterparts (Is There a Retirement Crisis? Examining Retirement Planning in the Household and Government Sectors, Andrew G. Biggs, Oct 2017). Obviously those who do not save do not retire with sufficient income. 

OK, but why do they need all this income anyway?

According to a report from the Employee Benefit Research Institute (EBRI) titled, Debt of the Elderly and Near Elderly, 1992–2016, retirees and especially those in advanced age do not necessarily live debt-free lives. On the contrary. Many of them have substantial financial liabilities and responsibilities. The study looked at debt of older people two different ways:

• Debt payments relative to income and;
• Debt relative to assets.

The EBRI found:

According to a study by Bankers Life Center for a Secure Retirement, only 23% of all Americans who retire do so debt-free. Most retire with at least some debt. A higher percentage of American families with heads ages 55 or older have debt, and families with the oldest heads are seeing the greatest increases. After 2007, the increase in debt has been most prevalent among the families with the oldest heads–ages 75 or older–where the percentage having debt has increased by nearly 60% (from 31.2% in 2007 to 49.8% in 2016). However, debt levels have decreased from their peaks in 2010, but the oldest families still have debt levels above their 2001 levels. The percentage of families with heads ages 75 or older with debt payments in excess of 40% of income increased by more than 23% from 2007-2016. This, coupled with the “Retirement Spending Smile” data, showing rapid and dramatic increases in spending late in life, tell a very different story than the “decreasing responsibility” narrative. And, the lockdowns and resulting economic crash that occurred in 2020 only exacerbated the problem. 

All this seems to support the idea that financial responsibilities actually increase with age, not the other way around (at least for some retirees). But, couldn’t spending patterns hypothetically decrease for older individuals? Sure, but the data shows that, on average, it does not happen for a good chunk of the population. Whether it’s because people need to go into debt to make up for a lack of savings or whether older people choose to increase debt levels for other reasons, the fact remains that a growing number of older people—in general—do not have decreasing financial responsibilities. An increasing number of seniors have systematic decreasing, then increasing, liabilities. It's not a "straight shot" one way or another. It's cyclical spending, with the cost of living rising in extreme old age.

OK, but so what? Does any of this matter?

It does, if you want to save enough, or avoid running out of, money before you die. And here is where financial planning needs overhauling, especially when it comes to life insurance planning. Needs analysis lives in the realm of the unreal and crumbles under careful scrutiny because its basic premise is incorrect.

Once again, if we travel back to the realm of reality, all insurance (including life insurance) functions to replace that which is lost. The flaws of needs analysis stem from the fact that these ideas largely ignore the value of the insured individual's life in favor of the needs of others, creating an unnecessary and bizarre dichotomy between the needs of the dependent and the value of the policyholder's life.

Apparent in the calculation for life insurance needs is the fact that "need" is arbitrary. For example, how does one determine a beneficiary's real need? What, exactly is needed versus what would be "nice to have"? If you live in a $400,000 home, do you really need that home or could you live in a $50,000 bungalow? Does your family really need $20,000 per year of your income, or could they scrape by on $10,000 for the very barest of necessities? Do your beneficiaries really “need” to pay off the debts you leave behind, or can they figure out a way to live on less and pay off the debt over time by themselves?

And, more importantly, why is your beneficiary's need more important than your value as a human being?

The stock answers to these questions are arbitrary because the questions themselves are unanswerable by any rational means.

The Human Life Value approach avoids the problem of unanswerable questions and arbitrary calculations by focusing entirely on the value of human life.

Aren't you insuring your life because you value your family as part of it? Set aside, for a moment, that most parents recognize and rightly accept they are morally responsible for their defenseless children. How does recognizing and insuring the full value of your life (which your spouse and children are part of) contradict their legitimate financial needs or wants? And, more importantly, if we assume you legitimately love your family, why would you leave them less money rather than more?

This last question is one that has never been answered rationally by proponents of needs analysis and the theorists of decreasing responsibilities. And yet, they have formulated an alternate theory to justify insurance "need" as distinct and separate from the value of human life. The flaws of needs analysis are not merely hypothetical. The theoretical flaws result in very practical problems for both the policyholder and the beneficiaries.

Specifically, needs analysis:

1. Assumes your death causes a very specific, static, financial need for your dependents, and thus;

2. Does not account for other financial planning goals you (or your heirs) may have, and does not consider the risk you or your heirs need to take (or can afford to take) in order to meet your financial goals in life (which implies how much money you can afford to lose);

3. Is generally based on deterministic assumptions. 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 make unreasonable probabilistic assumptions about the growth and appreciation of your current savings and assets, leaving you under-insured when you die.

Isn't Buying Life Insurance An Altruistic Act?

Absolutely not.

The altruistic motive behind life insurance purchases is one of the most widespread, and nearly unquestioned, myths in the insurance industry. On the surface of it, "altruism" sounds like the perfect motivation. You love your family, your spouse, and you want them to be taken care of.

Of course, there's nothing wrong with wanting to protect and provide for your family, but you don't do it out of altruism. You do it out of love. Doesn't love require altruism? 


Altruism means selflessness and self-sacrifice. It means putting others' interests ahead of your own or denying your own interests for the benefit of others. It means trading something that's valuable to you for something of lesser value or no value at all.

The question(s) raised then is: Is your family of any value to you? Are they of personal interest to you?

Put that way, it sounds absurd. Of course your family is valuable to you. Of course they're of interest to you. Denying yourself for your family would make no sense because you are a part of your family. Assuming your family is an important part of your own personal interest, then putting your family's interest above your own personal interests would mean, by definition, "putting your interests ahead of your own interests". It quite simply makes no sense. They are your interest. Doing things which harms your family is not in your best interest (again, assuming you truly love and value your family).

Taken at face value, altruism translates as "other-ism", and literally means self-sacrifice——a pointless act of self-sabatoge and self-destruction. This concept of self-sacrifice is smuggled into the more benevolent common "understanding" of altruism to make it appear legitimate.

But, it's a "package deal".

It mixes a legitimate idea with an illegitimate one. The benevolent understanding of "altruism" is actually not altruism at all, but rather "self-interest". Self-interest and self-sacrifice cannot co-exist. They are polar opposites.

What about love? How do you love someone selflessly and what would it mean to do it? It would mean, in effect, telling someone you have no personal, selfish, interest in them at all but that you instead love them for their own good or out of pity. That, too, is absurd. No one loves their family that way, and no one would feel loved under those conditions.

And yet, therein lies the contradiction. We are taught that love, selflessness, and altruism are intricately tied together. 

They're not. It's a lie.

Love is selfish.

What, then, does this mean in regards to buying life insurance?

If you were truly, literally, buying life insurance as a selfless act, you would buy a life insurance policy, wait out the 2-year suicide exclusion clause in your policy and then kill yourself for the benefit of your family who would receive all that money.

That's nonsense. No one does that, and no sensible person would advocate for it.

What sensible, rational, individuals do is buy life insurance because they love, value, and care about their family and want to protect them against the catastrophic financial loss caused by their eventual death. The policyholder/insured person must have some sense that their life is valuable enough to insure, and that it is a wise financial decision to do so.

Thus they must, on some level, have a self-interested motivation to both buy life insurance and stay alive for as long as possible, even if their own understanding of what they're doing is still somewhat vague, fuzzy, or implicit. 

The more explicit a policyholder's understanding of their own motives, the more valuable their life insurance policy can potentially become to both them and their family. The more vague their understanding of their motives, the less potential value their policy has for them and their family.

In The Economics Of Life Insurance, Huebner writes to this very idea:

“Every person imbued with normal ambition desires to increase his current production as much as possible, and to accumulate an estate of decent proportions. In the fulfillment of this desire, life insurance serves the individual creatively in five main ways, namely, promoting his initiative, by increasing and maintaining credit, by fostering thrift, by conserving and improving through sound investment that which may be saved out of surplus and by prolonging the working life itself. In their treatment of life insurance, economists have gener­ally taken the position that it is not essentially a producer of wealth, but that its fundamental mission is to take "from the many fortunates" funds already in exist­ence and to distribute the same "to the unfortunate few." This view, which interprets life insurance as belonging to the field of distribution rather than production as regards its fundamental nature, is essentially wrong in its emphasis. It reflects the property viewpoint and overlooks largely the causal relation of the human life value to the creation of property values. Upon care­ful analysis, life insurance will be found to be a direct and powerful force in the creation of wealth, particu­larly along the five indicated lines. It is the purpose of this and succeeding chapters to explain these creative functions of life insurance.

It is regrettable that life insurance has been so generally regarded in the past as an intangible and altruistic service, intended almost altogether for the protection of widows and orphans and related only remotely, if at all, to the insured's personal advancement and happiness. Life insurance is not intangible and vague. On the contrary, it is a very definite proposition designed, as previous chapters have shown, to apply the economic principles relating to capitalization, depreciation, sink­ing-funds, indemnity, surplus allotment, and liquida­tion, to human life values, as we are accustomed to use them in the scientific management of property. Its very purpose is to render tangible and definite the intangible and indefinite elements of our economic life. Similarly, life insurance is not altruistic in the sense that its purchase should invite special commendation, as compared with the purchase of other economic products or serv­ices. Instead, its purchase is just plain common sense from a business standpoint, and just plain justice when a dependent family is involved-an ethical duty of the husband, a wife's right, and a child's claim.

Nor should our view of life insurance protection be limited to protection of widows and orphans only, al­though that function of life insurance is all-important and needs always to be emphasized. There is no intention whatever to minimize this outstanding service of life insurance. But it is also important to know that the expression "life insurance protection" reaches beyond wife and children. The concept is broader in that it also extends to the insured-the premium-payer. In other words, a more balanced emphasis is required. The over­whelming majority of adults-the 98 per cent-have weaknesses along economic lines. They need to be pro­tected through the life-insurance method against those failings as they relate to personal endeavor, health con­servation, thrift, investment, and the orderly arrangement of their monetary affairs. The protective influence of life insurance extends to the insured himself, enabling him to live more efficiently and fully than would otherwise be the case.

Man loves to deal in tangible things that promise a definite economic result for himself. In his economic purchases he is almost always actuated by the sense of personal gain. He is, in other words, commendably selfish; and that is not at all a bad thing, judging from the tremendous economic progress of this nation directly attributable to private initiative prompted by antic­ipated personal profit. With that thought in mind, should emphasis upon the intangible, and purely un­selfish nature of life insurance remain so largely our principal avenue of approach to the premium-paying public?

Most of our life insurance education seems to be imbued with this view, and much of our educational effort therefore fails to appeal to man as he is consti­tuted. In other branches of applied economic learning the emphasis is upon the tangible aspects, and the per­sonal return derived from commendable private initia­tive. Why should not we make our insurance education conform to a similar standard, since the subject matter involved is equally tangible and equally gainful to the purchaser? Should it not be our purpose to make the purchaser of life insurance see-from the standpoints of increased initiative, freedom from worry and fear, main­tenance and enhancement of credit, thrift, investment, protection against business interruption, protection against depreciation of estates already accumulated, scientific management of the human life value, and health conservation - that life insurance in the last anal­ysis is a very commendably selfish service that is well worth the premiums paid, that it is highly creative to the insured himself both materially and mentally, and that it is just as utilitarian for self-advancement and personal gain as any other economic act? Should we not advance the thought that life insurance always involves two beneficiaries, namely, those who are designated to benefit in the event of the premium-payer's death, and also, and this is highly important, the premium-payer himself while he is living?"

The inherently selfish act of insuring one's own life, and protecting one's own income, savings, and personal assets cannot be legitimately ignored.

An individual’s objective financial value can be measured by the net values he or she creates for others and society—not as an altruistic duty, but as a moral and practical necessity of living, protecting one’s personal autonomy, and providing for one’s own welfare. It is the ultimate act of personal responsibility. 

The necessary financial risks a person takes to make his own way in life, to start and succeed in business or a career, or to start a family is the reason why life insurance exists——to blunt those financial risks. In essence, a person takes substantial and significant financial risks to acquire valuable things in life, and life insurance acts as a financial hedge against losing those valuable things. It may not be able to replace them (and in the case of human life, cannot replace them), but it can compensate for the financial loss associated with whatever is lost or destroyed. The more valuable things a person acquires in life, the more protective life insurance becomes.

Secondarily, one earns a living to both provide for himself and to protect the welfare of others that he has voluntarily agreed to protect. Of course, creating net values for others and society is not done freely. There is always a mutually-beneficial exchange—value for value. In this case, money for products and services rendered.

The income becomes the basis for the human life value, as it represents economic values created by the individual’s own self-initiative. These values often represent irreplaceable time and effort on the part of the individual. Loss of that value can be, and often is, catastrophic at death. But, it is also severe if a person lives to suffer a disability or a decreased ability to produce tradable values (and thus, suffers a decline in income).

This loss of value is what is protected by life insurance.

It is the loss of income, while alive or after death. By extension, that loss of income also represents a loss of savings, since savings is derived from one’s ability to earn an income. Thus, life insurance not only protects an individual’s income, it protects all the things a person buys with his or her income, including financial products used for saving and investing. Since you cannot do anything (in an economic sense) without an income, life insurance protects against the totality of economic loss possible to an individual.

By extension, it also compensates the beneficiaries for future income not yet earned. The assumption is that an individual always has earning potential and that earning potential is worth something (which is why it can be insured). Everyone needs income until they die. Even if humanity solved the problem of biological aging, creating a population of biologically immortal humans, there would always be the risk of accidents and unforeseen events. In fact, on an infinite time horizon, the risk of accidents increases into infinity. If a person hypothetically lived forever, they would have an infinite need for income and probably an infinite need for life insurance. As assets and income increased into infinity, the risk of loss would also increase into infinity.

Since life is not automatic, and is not guaranteed, there is always the possibility of accidents, loss, and death at any age. And, in spite of current advancements in medical technology, everyone still eventually dies.

Given that insurance's main function is to replace that which is lost, what then can we infer from the needs analysis approach to life insurance? Well, regardless of circumstance, every individual makes a specific amount of money over their lifetime and no more (and no less). This is, by definition, how much an individual is worth (economically). They cannot be worth more than what their productive potential allows, and certainly they are not worth less than they actually make... else they would be earning less money.

In other words, everyone is worth exactly what they produce. Perhaps this is offensive to some, but it is—nonetheless—the truth. And to an intelligent reader, the obviousness of this almost seems silly to mention except in the context of needs analysis, where mathematical calculations assume that it would be prudent to buy less insurance than what an individual is worth.

Would you buy less insurance than what your home is worth? Would you buy less insurance than what your car is worth? These questions answer themselves. And yet, the needs analysis approach to life insurance assumes this is appropriate in the context of life insurance.

Can't You Over-Insure Your Life?

But, can’t you somehow “over-insure” your life? Isn’t this the main reason that The Theory Of Decreasing Responsibility argues that you should do a “needs analysis” — to avoid a greedy insurer from selling you too much insurance? That financial planners and insurance agents worry about greedy life insurance companies is the primary reason why you shouldn’t.

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. The death benefit of a life insurance policy is, always and everywhere on the balance sheet, a liability to the insurance company. There is extraordinary risk in over-insuring an individual. Consider the catastrophic losses a life insurance company would suffer if it routinely insured individuals to such an extent that their policyholders were worth more money dead than alive. The economic justification for risk control and insurable limits is obvious.

The very thing that some financial planners and insurance agents hate the most, and unfortunately what seems confusing to a great number of life insurance company executives——the profit motive——is precisely what protects you from being over-insured by an insurance company. 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 the guarantees of even a modest life insurance policy. So, they want to make sure the policyholder can afford to pay for the policy (and thus, the transfer of risk to the insurer).

Human Life Value accounts for this fact explicitly by creating a direct link between life insurance and total economic value, which prevents over-insurance. It also accounts for the fact that individuals can potentially remain productive for their entire life, preventing the opposite problem: under-insurance.

None of this is to say that you are morally or legally required or obligated to buy life insurance. Your decision to buy (or not buy), as well as how much life insurance you buy, is your choice, obviously. But let’s be real. No one needs life insurance in the arbitrary or dutiful sense. More than that, a beneficiary's legitimate needs are not distinct and separate from the economic value of your life, making needs analysis superfluous, at best. People cannot be insured for more than what they are worth, but they can be insured for less, which is the objective danger of needs analysis.

Needs analysis calculations routinely result in life insurance recommendations which are less than the full human life value amount for an individual. So, either financial advisors are willing to underinsure their clients or they are willing to sell their clients full replacement value on their life. It cannot be both ways. It's either one or the other, Needs Analysis or Human Life Value.

Again, making needs analysis unnecessary since Human Life Value already addresses this issue. What, then, is the real purpose of needs analysis and the Theory of Decreasing Responsibility? Possibly, to mislead and confuse you about the nature of life insurance and how much of it is appropriate to buy.

Needs analysis relies on you feeling a sense of duty to your family, whether legitimate or not. But, fear-based, guilt-tripping, duty-bound, purchases of life insurance are, and have always been, uninspiring. No one wants to be "sold" insurance and even fewer want to buy it under high-pressure sales tactics or duress.

The good news is, life insurance isn't about need or a duty to your beneficiaries. It's about your human life value. When viewed from that perspective, the only relevant question you need to consider is: "How much am I worth?" Buy that amount, and you’ll be fine.

Learn More About Life Insurance

Protect yourself, your loved ones, and build real lifelong financial security. Learn (almost) everything you need to know about life insurance by reading The Rogue Agent's Guide To Life Insurance.

About The Author

David C. Lewis, AKA The Rogue Agent, is a licensed independent life insurance agent (License No./NPN: 8462895), specializing in life insurance planning and The Perfect Policy™ design concept. He is also the owner of Monegenix®. To learn more about him and his work, read his full bio.