When discussing life insurance with prospects, is Human Life Value ‘overkill”? After all, insuring someone up to their full HLV can be a pretty big number—one that most people have a hard time wrapping their heads around. It’s often easier to just offer them the amount they want. However, it’s incredibly important that you at least introduce the idea of HLV to your clients and prospects. Whether they end up buying up to their HLV is less important than making sure they KNOW what they’re worth.
After all, you wouldn’t partially insure your home or your car because you don’t NEED to replace it at its full value. But when you have something of high value, you often WANT to replace it at full value. So why do we encourage people to only get insurance based on their “needs,” rather than their true worth in the eyes of the insurance company?
Insuring to Human Life Value gives your client as much certainty as money can buy…quite literally. Their estate or their heirs may not need that full amount, yet the full amount is what gives the family flexibility and freedom.
How Do You Solve for Human Life Value?
The general rule of thumb for Human Life Value is having a face amount of the client’s Net Worth, or by multiplying their income by about 15 to 30. That multiple isn’t random, it actually represents the number of years your clients has until typical retirement. In other words, how much money a client can expect to earn during the remainder of their working years if their income stays the same.
For those who are in their 20s and 30s, you’d then multiply their income by 30 (or even a bit more). Someone in their 40s might multiply income by 20 or 25, while someone in their 50s might multiply by 15.
The Net Worth rule can apply to anyone at any age, although someone in their 20s may not have much of a Net Worth yet. On the flip side, someone with significant assets may even be permitted to double their Net Worth to solve for HLV.
Human Life Value Illustrated
In the Truth Concepts calculator suite, it’s possible to show HLV in a way that highlights the importance of the concept. You can actually use two different calculators to prove out HLV: Maximum Potential and Cash Flow. Here, we’ll use Cash Flow because it gets into the details.
In the Cash Flow calculator, we’ve input information for a 30-year-old with an income of $100,000. Until retirement, he has the potential to earn a total of $3.6 million. If you consider that he may get some raises, say 4% annually, he has the potential to make $7.7 million.
If you consider that he may get some raises, say 4% annually, he has the potential to make $7.7 million.
Using Cash Flow, we can then illustrate exactly how long that income will last a surviving spouse. If you plug the Present Value into the Cash Flow calculator and make it function as a withdrawal sequence, you see that those funds will only last 36 years as well.
If your client is insured up to this full amount, let’s consider what might occur. Say the surviving spouse is left with exactly $3.6 million. She is a non-working spouse and decides to use the money as income replacement after her husband passes. She decides to play it even, and only takes the $100,000 for income. That gives her 35 years of income.
However, thanks to inflation, she finds this $100,000 doesn’t quite keep up. Instead, she decides to take 4% more each year in order to cover expenses that are just naturally increasing. Now she’s only got 22 years of full income.
A few million dollars may SEEM excessive right now, however, it can make a world of difference.
The Moral of the Story
HLV may seem like a huge amount of money to your client. They may feel uncomfortable with that much insurance. They may not even have the capital to have all of it in whole life insurance. However, it’s critical knowledge to impart to your clients. Because knowing what they are ENTITLED to get helps them make a more informed decision about what they DO get.
Furthermore, when you have a good relationship with your clients, you are going to be working with them over a period of 30 or more years. It’s better for them to take any step than no step because then the door is open for them to grow. If they don’t fully insure from day one, that’s okay. In fact, don’t discount the power of insuring up to full HLV with a combination of whole life insurance, term insurance, and convertible term. For many people, some combination of insurance types is going to be the most efficient for them in the beginning. As more capital becomes available to them, then they can get more whole life on the books.
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