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Would you buy a $50,000 car yet only insure it for $30,000 because you only NEEDED a
$30,000 car?
NO! and yet the life insurance industry does this all the time with people by completing a “needs analysis” to determine how much life insurance you “need”.  YOU don’t “need” any, but you family may.  However, trying to figure out how much THEY need is an exercise in futility.  Oh, and the thought that single people don’t NEED life insurance? It’s as correct as saying they aren’t worth anything.

So, how does one figure out their own Human Life Value?  Life Insurance Companies have rules of thumb they use, such as 15-30 times income or 1 x net worth.  Typically for someone between the ages of 20 and 30, Human Life Value is 30 X income.  Age 30-40 HLV is 20 or 25 X income.  Age 40-50 is 15 X income.  Age 50-60 and beyond is 10 X income.  Any age can use the 1 X net worth rule of thumb and this can be up to 2 X depending on business owned and asset base in existence.

We can use the software to figure it out more specifically.  There are 2 ways.  The quick way is to use the Maximum Potential calculator, the slow but potentially more accurate way is to use the Cash Flow calculator, the Present Value calculator and then the Cash Flow calculator again.

Looking at the Maximum Potential calculator, put in the number of years until 65 (that’s a retirement fallacy, addressed in another article) the income and NO other data.  So in the case below, we have a 30 year old with 35 years until 65 and currently earning $100,000 per year.  Obviously the income will increase over time, but for this snapshot, the information is accurate.  Human Life Value changes over time as income and net worth change. 

You’ll notice above on the right, the potential is 3.5 million for this person.  While that is slightly higher than the rule of thumb mentioned above, it is a guideline for Human Life Value.

A more specific way to determine HLV (and a way to tell the whole truth about what it would take a family to live in their current world if the main income generator dies) is spelled out below using 2 Cash Flow calculators and a Present Value calculator.

We’ll take a 35 year old earning $100,000 with 4% annual raises, and a 5% earnings on assets capacity.  The Future Value of that scenario is $16,484,000 in the bottom right. 

Then you take that $16,484,227 Future Value and using the Present Value calculator reduce it back to figure out that it would take $3 million of today’s dollars to replace that future earnings stream, assuming a net 5% rate. 

More importantly, that $2,998,430 goes to zero in 35 years, so the widow will have to save a portion of that $100,000 – just as the family did when everyone was alive – in order to have a continued income stream past the 35 year period.  Notice the account rises a bit first, and then shrinks to zero. 

Moral of this story?  Most people are insuring their $50,000 lives for $30,000 because some “needs analysis” calculator told them they only “needed” $30,000.  A person’s Human Live Value is the only way to figure out the insurance “need” and so for many, that means using a combination of whole life and term insurance since most can not buy their HLV in all whole life at the outset.  There is nothing wrong with term insurance when it is used for a term of time, is convertible to whole life, and the owner works to convert it slowly over the course of time so that by age 65 or so, it is all whole life.