The Human Life Value Approach and the Fallacy of “Needs Analysis”

scale balancing a clock and a coin. Human life value concept

It’s not uncommon for people to write off the human life value approach as “overkill.” Clients either believe that buying insurance up to their full human life value (HLV) is simply too much money for their heirs or the number doesn’t seem real. This approach, however, can be incredibly valuable for your clients. 

Consider this: Would you buy a $50,000 car yet only insure it for $30,000 because you only NEEDED a $30,000 car? No, you wouldn’t dream of doing so, or you would shortchange yourself. And yet, this happens in the life insurance industry all the time by way of a “needs analysis.”

The problem with a needs analysis is that it’s ultimately futile to determine how much life insurance is necessary. There are too many extraneous factors, including inflation, taxes, potential future earnings, and exactly how much you “need” to replace.

Solving for the human life value concept resolves some of this because the answer to the question: “How much life insurance should you have?” becomes: “As much as you can get.” Insuring your client up to their full human life value gives them as much certainty as money can buy — quite literally.

The Human Life Value Formula

Generally, the rule of thumb for calculating human life value, according to life insurance companies, is multiplying income by 15 to 30, or insuring up to a client’s net worth. This multiple isn't random; it's a human life value formula represents current income multiplied by the number of years the insured is expected to earn an income. (In other words, the income your client has left to earn until the expected time of retirement.)

For example, a client in their 20s or early 30s generally measures their human life value by multiplying income by about 30. Someone between the ages of 40 and 50, for example, would multiply their income by 15. Above 50, multiplying income by 10 is a more realistic human life value formula. The net worth example can be used by anyone at any age. It can even double for those with significant assets. 

How to Illustrate HLV With Human Life Value Calculators

Using Truth Concepts human life value calculators, there are two ways to calculate for HLV. The first uses the Maximum Potential Calculator, and the second uses Cash Flow. Maximum Potential is an easy, straightforward way to illustrate the human life value approach, and Cash Flow provides a more detailed picture of your client's HLV.

Maximum Potential: Human Life Value Calculator 1

If you would like to use the Maximum Potential calculator, start by putting in how many years your client has until age 65. While we don’t believe in typical thinking about retirement (spoiler alert: 87 is the new 65), 65 is an age most clients can get on board with for retirement. Then, add your client’s income. That’s it. 

In the below example, you can see that we have a 30-year-old earning $100,000 per year, illustrated over 36 years. While this doesn’t account for changes in income and net worth, it’s an accurate snapshot of the client’s current financial position.

Essentially, it illustrates how much income the client would generate (and therefore want to replace) over his working years. If he passed away the next year, his family would be protected from the loss of his income. 

Human life value approach demonstrated with a human life value calculator

While this example is a bit general, it paints a straightforward picture to the client. He has the potential to earn 3.6 million over his working life. And why would he not want to insure his entire income? Keep in mind, this is assuming he never gets a raise and stops working right at age 65. 

Cash Flow: Human Life Value Calculator 2

If you’d like to get more specific, Cash Flow is your go-to human life value calculator. This is what we consider a “whole truth” scenario, which gives your clients a detailed picture of their HLV. 

In Cash Flow, let’s take the same 30-year-old with an income of $100,000. Let’s also assume that every year he receives a 4% raise and earns 5% on his assets. The future value of this client’s income is $17.722 million. 

Using Cash Flow calculator to demonstrate human life value approach

In today’s dollars, that looks like about $3 million. You can calculate this by inputting the future value into a Present Value calculator at 5% over 36 years.

This means the client’s spouse would need about $3 million of today’s dollars, earning 5% each year to replace that total $17 million future value. The only way that $3 million is possible is to have it in a Death Benefit, unless the client has $3 million in savings. 

The “Future Savings” Element

The Cash Flow calculator also reveals a deeper truth about savings. If this client is the main income earner, he is also likely the main source of savings. So if he passes away and the Death Benefit is paid, that income replacement is a ticking clock.

If the spouse uses it solely to replace that $100k income, that’s only 35 years before the sum reaches zero. This means that the spouse will want to solve for this loss of income stream through work and savings. 

We can illustrate this by copying and pasting the Present Value of about $3 million into Cash Flow and keeping it at 5%. Then, simply turn the positive Cash Flow of $100,000 at 4% into a withdrawal of $100,000 at 4%. You’ll see that in the 36th year, the account has been fully liquidated. 

Human life value formula shows account diminishing over time after death benefit is taken

The Moral of the Human Life Value Approach

Human life value may seem like a lot of money, but it really only insures your client’s exact income over their working years (assuming a typical retirement age). It’s actually an incredibly reasonable number when you look at the calculators.

The moral here is that many people only buy $30,000 insurance on their $50,000 lives because of a “needs” analysis calculator. However, if you base your insurance on the bare minimum, your family is left with the bare minimum. 

A human life value calculator is the only way to get an accurate representation of the coverage your client “needs.” Does this mean a client can only buy whole life insurance? No, a combination of whole life and convertible term insurance can provide comprehensive coverage, flexibility, and affordability. The key is that any decision you help your client make includes flexibility, because life is full of uncertainty. To learn more ways to show the whole truth using Truth Concepts calculators, we encourage you to attend Truth Training. These live, three-day events will help you understand and use the calculators in new ways.

Are you looking for more ways to show your clients the massive benefits of whole life insurance? Explore the Whole Life Insurance Calculator.

2 Responses

  1. What HLV will be for a retired petson, getting monthly pension?

    1. Thanks for your question. For a retired person, HLV is 10x their income at 65 OR equaling the value of their Net Worth, whichever number is greater.

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