It’s not uncommon for the Human Life Value approach to be written off 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, is actually incredibly important 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–you’d be shortchanging 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 try and 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 solves some of this, because the answer to the question “How much life insurance should you have?” becomes “As much as you can.” Insuring your client up to their full HLV gives them as much certainty as money can buy, quite literally.
How Do You Solve for the Human Life Value Approach?
Generally, the rule of thumb for calculating HLV, 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 actually 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 “typical” 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 going to be more realistic. The Net Worth example can be used by anyone at any age, and can even double for those with significant assets.
How to Illustrate the Human Life Value Concept
Using the Truth Concepts calculator suite, there are actually two ways to calculate for HLV. The first is using the Maximum Potential Calculator, while the second uses Cash Flow. You can choose either calculator, based on your preference.
If you would like to use Max Potential, start by putting in how many years your client has until age 65. While we don’t believe in typical retirement (spoiler alert: 87 is the new 65), this is an age that most clients can get on board with. 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. What it illustrates, essentially, is 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.
While this example is a bit general, it paints a simple and straightforward picture to the client. In this example, the client has the potential to earn 3.6 million over his working life. Why would he not want to insure his entire income? And this is just assuming he never gets a raise, or stops working right at age 65.
Cash Flow Calculator
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 will give 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.
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 in order to replace that total $17 million future value. The only way that $3 million is possible is to have that in Death Benefit unless the client happens to have $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. This means 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.
The Moral of the Human Life Value Approach
Human life value may seem like a lot of money, however, it really only insures your client’s exact income over their working years (assuming a typical retirement). It’s actually an incredibly reasonable number when you look at the calculators.
The moral here is that there are people only buying $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.