Human Life Value – Episode 377

This transcript was auto-generated and may contain errors.

[00:02] In the life insurance world, there’s a phrase called human life value. In today’s episode, we’re going to be talking about the human life value, how to understand it and we’re going to go through all of the details to help you know what number is fit for you. Does that sound like a plan? I love it. And it’s such a cool terminology and so many people are just completely unaware of it. It is very true. So I think one, this is more of an internal used term, meaning the agents like to use this a lot, but the consumers need to know what this is and they need to actually understand where they can pull out of the complexity and know what kind of behind the scenes that you don’t need to become licensed, but you actually need to understand this

[00:52] piece. Absolutely. It’s a shame that it’s not used externally because it should be. Yes. So first, can you define human life value and then we want to unpack all the bits and pieces to that. Yes. Yes. So it is the maximum amount of life insurance that you can have on your life insurance irrespective of company or type. So it doesn’t matter. It could be one company. It could be group. It could be personally owned. It could be different companies. It could be term insurance. It could be whole life insurance, but it is an equation, which we’ll get to in a minute, that will calculate the maximum amount of life insurance that you can have. And in this instance, I’m speaking about the death benefit.

[01:44] In other words, the amount of money that would pay when you die, not the cash value. Okay. Excellent. Assuming this is what’s going to be really helpful for you listeners, if you have maxed out your human life value, we’re going to give you additional solutions. So first, let’s get to the equation. Yes. And I will say that 99.9% of the listeners have not maxed out their human life value ever. It just rarely happens. I have some clients that have human life value. Frankly, I’m embarrassed to admit that I don’t have more because it’s something that I too got away from for a while with my client base, which I apologize for. It’s something that people should be talking about, fulfilling to the degree that they

[02:34] want to. We identify maximum. It doesn’t mean you have to go there, but you should at least identify it. And so this is the calculation and it is very easy. And then I will also tell you kind of a funny story about how it can be very difficult. So the easy calculation is in your younger earning years. So let’s say up to age 70. It is a function of income in most cases, and it is between 15 and 30 times your income. So let’s just use a normal couple where both are working. Now I’m going to keep one at home for the example, actually. We’re going to keep dad at home. How’s that sound? Hey, I like that. I do too. So you have a woman and the gender is not relevant. I just bring it up to keep straight who we’re talking about.

[03:24] You have a woman. She’s earning a hundred grand a year. She’s in her thirties and you’re going to use her income times 20 or 30 because she’s younger. You’re going to use the longer time frame. So how do you choose between 20 and 30? That’s a big difference. Well, a lot of different ways. So you could just even use the 30, you know, go for the top number. You could absolutely get that approved. Again, remember this is a combination of companies and types of insurance, including group insurance, but it’s 20 to 30 times income. And then if you’re older, say you’re in your 50s, 60s and 70s, now it’s going to be 15 times income, maybe even 10 times income. So let’s say that same woman is 60 years old.

[04:10] She still earns a hundred grand. And then it’s a million is her human life value or a million five, something in that realm. I have a couple of questions I want to dig in, but if you need to list the rest of the equation first, then that’s cool. I think we should just to hit the high points and then we will definitely do the digging in. Let’s do it. So the stay at home parent, which is clearly technically not earning an income right now, they can usually get about half. And then the other part of the equation, and this is really important for the older set. So 60, 70, 80 year olds. It’s also relevant occasionally on younger people, especially when they have a lot of real estate. The other part of the equation is one times gross

[04:51] worth, not net worth, gross worth. And so the example here is you have somebody and they own 18 million dollars of real estate, 16 million of it is indebted. So their net worth is two million. Well, they can actually qualify for 18 million of coverage because it’s one times gross worth. Perfect. OK, so you’ve actually helped dispel a lot of the mysteries to this. And so that’s where I wanted to dive in. One, I think the gross worth, if you look at it just from a simple piece of if a person was terminated and we went only after net, well, that’s quite a burden to their family and everyone else. So, yes, check the box on that one. So, everyone, now, if you know what your gross is, now you know what you should

[05:40] be aiming for on your on your human life value. So going into the income, 30 year old female, 100,000 a year. Now, what happens, you know, when we have other investments into play and we’re not talking about income, but we’re talking about maybe ownership of real estate. We have all these pieces. And so how are you balancing between the gross worth and the income and all these pieces? And when do you decide this is the path that’s best fit for you? Well, that’s the funny thing about human life value is it basically ignores all the other assets that a person has at the top level. When you’re just starting out and you’re defining human life value, you are defining it as a function of income and you’re not taking into consideration

[06:24] anything else. And when you start to take other things into consideration, which is completely legitimate, you get more into what’s called a needs analysis, which is the way that probably 80 percent of the life insurance industry functions. We’ve gotten away from human life value and shifted more to this, quote, needs analysis. And it’s really, really detrimental. And here’s why. It’s fine, of course, to take into consideration some assets, but a needs analysis tries to figure out only what you need, not what you are worth. And there’s a big, big difference. And let me use a car as an example, because I think it’s easier to get our arms around. And let’s also understand that insurance is designed to replace value,

[07:19] not need. In other words, if we drive a $50,000 car because that’s what we can afford, that’s what supports our business. Well, that’s the kind of car that what we want it to do. Right. Very big difference. Then we’re going to ensure that car for $50,000 because that is what it’s worth. Now, if we did a needs analysis on that car, we could easily say that you only need to drive a $20,000 car. In fact, frankly, depending on where you live and what your workday is like, you really only need a bicycle or a scooter or your feet, something else like that in terms of you having transportation. And yet we have a $50,000 car worth $50,000. So we insure for $50,000, not the $20,000 that we need or the, you know,

[08:12] pair of shoes on our feet, if you will. See the difference? I do. Yes. Okay. So let’s apply that exact same concept to life insurance. And it’s extra funny because death is a guaranteed event, a car accident or a car being totaled by a tree or something like that. That’s not a guaranteed event. And yet we ensure our cars for their value, their full value, but we don’t ensure our lives for our full value when this type of insurance is guaranteed to pay, assuming that you have permanent insurance. And yes, we all know there’s term insurance, which of course is still guaranteed to pay just as for a short term of time, like 20 years or 30 years or one year or whatever it is. And yet we go in knowing that there’s a guaranteed event there,

[09:01] but we only want to ensure for what we think we need. And the needs analysis do take into consideration all those other assets. They try to figure out income, inflation rates. They try to figure out interest rates. They try to put a whole bunch of math, basically reducing the value of this human being and their work in the world coming up with a number that may be mathematically correct, but has nothing to do with our lives. So Kim, there’s something in here that you have said that actually like dovetails perfectly with other podcasts. And I’m going to reveal that right now. This is to me, this is very revealing, which is we’ve had conversations about budgeting and we could on this podcast have talked about ways that you can save on lattes.

[09:49] And then there’s different investment accounts and how you can find the best online brokerage and get 0.5% better or whatever that is. And we could dive into all of those details. Whereas Kim looks at it and says, you know what, save 20%. If you save the money and then you have money left over, there you go. You use that and you’ve used that example with your kids and with other people out there. Simplicity. This right here is the simplistic way of approaching it. And I would assume that outside of most engineers, this is the way that most people want to take. Is that correct? Yes, really well said. So wonderful. Yes, absolutely wonderful. And it is so interesting because since it is not brought up and like I

[10:30] admitted, I, I went through a numerous year period of just really focusing on the cash value because human life value to be funded. And again, not everybody wants to go to a hundred percent of it. You could, you can go to 75% of it or 50% of it or whatever is going to be funded with a combination of whole life and term insurance. I have never met a client that had the ability to fund their human life value with all whole life insurance because the human life value is going to be a higher number and the cash flow is not capable of funding that with whole life insurance. And so it should be funded with a mix of whole life and term insurance. And this is something else we’ve talked about on podcasts is rather than

[11:22] having the discussion, should you buy term insurance and invest the difference or by whole life insurance, it should be a discussion of what’s the top line, your human life value. Again, just make it 15 to 20 times income, you know, use that simple calculation. And yes, you could go up to 30 times if you’re younger, then go to the bottom side, which is your cash flow, which is your saved 20% suggestion, figure out how much of that will buy whole life insurance and then fill the difference with term insurance. So let’s just use some easy numbers. Let’s say that you could save 10 grand a year and that it bought a million dollars. So you’d be on the younger side to have this happen of whole life insurance.

[12:09] And maybe that was a paid a petition mix. Maybe it wasn’t, let’s not get convoluted with that discussion right yet. Then let’s say your human life value was 2.5 million. So you’re going to have a million dollars of whole life and you’re going to have a million five of term insurance, assuming you wanted full human life value. And if you have a young family, you absolutely positively want a full human life value. If your kids are grown and gone, maybe you only want 75% or 50% or something like that. So that’s some guidance that I think will really help people. And so for all my clientele where all of our focus was just on the cash value part and not really on the death benefit part, I’m going to encourage you to grab some term insurance.

[12:54] You can just go on the web and go to any website that will enable you to buy some, I’m going to call it cheap term insurance. That is a legitimate use of that word, or you can contact us and we can get convertible term insurance because convertible term is not as cheap because it is convertible to whole life or switchable to whole life. And I know we’ve done podcasts on that subject as well. And so filling the difference between the death benefit that you have with your whole life insurance policy and the human life value that you have with term insurance is the action item that I’m going to leave for our listeners on today’s podcast. Fill the difference or at least as much of the difference as you’d like with

[13:45] term insurance. Oh, this is so good. I’m going to add in one more piece because it’s something from another episode we’ve done, which is I think for some of the listeners that are getting up there in age 50, 60, 70, 80, 90, whatever you want to call that. If the insurance is not possible due to health conditions or it’s maybe doesn’t make sense cost wise. Would you suggest that that point looking to getting the insurance on children, other family members? Yes. So as we’ve talked before, you always want to start with the older generation and go down and also the main breadwinners. So that’s a critical distinction as well. And yet if for whatever reason it’s not possible, then yes, you go to the next generation.

[14:30] So if you’re 60 and 70 and you’re listening to this, you want to be looking at ensuring your adult children. And if you’re 40 and you’re listening to this and for whatever reason, you’ve got a medical condition spouses, and then yes, your own children likely, you know, in their younger years. Well, this is wonderful. Kim, you’ve really unpacked the human life value and now we know, and I am going to do some air quotes right now to quote, fill the difference. So there we go. We’re going to put some show notes about this. And if you do have specific questions for your use case, reach out to Kim at hello at partnersforprosperity.com and a side note, this episode came from a listener question. So if you liked how we dove into these details about human life value,

[15:24] and you have other questions that are related to this, or maybe even non-related, but you just want us to dive deeper. Please send those into hello at partnersforprosperity.com. Thank you for listening to the Prosperity Podcast. To take control of your money and have it work for you, visit us at partnersforprosperity.com. If you liked this episode, make sure you subscribe and leave a review.