“The proper way to think about life insurance (and disability insurance, critical illness insurance, and even unemployment insurance) is a hedge for your human capital. – Moshe Milevsky, Associate Professor, Schulich School of Business, York University and respected financial author
Your home is not the biggest asset of your life.
If a 25-year-old earns a starting wage of $40,000 before taxes and works for 40 years, and receives a pay-hike of 2% per year, they can expect to earn almost $2.5 million during their working career and their annual income will rise to $87,000 by the time they retire. That’s a good chunk of change.
The downside of this lofty financial equation is nobody knows what life might throw your way during those 40 years. Nobody can predict the weather accurately, or the stock market for that matter, for one day in advance let alone months, years or decades. It’s worth thinking about what would happen to your family and your dependents if your human capital was suddenly put into crisis mode. What if you suddenly couldn’t work, what would you do? Here are some basic lifecycle stages I came up with that probably apply to most individuals or families:
30s, 40s, and 50s – career growth important, many responsibilities associated with growing families:
- Human capital generates income
- Income can be saved
- Savings can lead to investments, growing financial wealth over time.
When you’re young, risk mitigation strategies that could destroy your human capital seem very important.
50s, 60s – career growth less important, less responsibilities associated with growing families:
- Financial wealth grows until tapped for retirement expenses
- Asset allocation decisions may change
- Life expectancy variables may change.
As you get older, wealth preservation strategies become much more important.
I sent a few questions I had about human capital recently to someone who is an expert on it, Lorne Marr. Lorne is a marketing consultant at LSM Insurance (affiliate). Lorne has worked in the insurance industry since 1993 and has been quoted as an industry expert in numerous mainstream publications over the years including The National Post, The Toronto Star, The Toronto Sun, The Globe and Mail and MoneySense magazine.
My Own Advisor – younger investors typically have far more human capital (than financial capital). How should this factor into the insurance decisions they make?
Younger employees or self-employed people especially need to realize their ability to earn an income is their biggest asset. Protecting that asset is the base of any financial plan. Life and disability insurance should be the foundation of many other financial building blocks. You have to make sure your income is protected if you die or become sick. These are some of the unfortunate realities of life and you need to take the emotions out of it, to make sound decisions for you and your family.
My Own Advisor – what things can we do to protect our human capital?
It probably goes without saying but it’s worth repeating that exercise and nutrition are crucial things to do along with other strategies to manage stress. On the exercise front I really think the key is put it into your agenda like any other appointment. Things happen but if it’s in your agenda you will get to it more times than not. I think another important factor is to minimize the amount of negative stimulus in your life. This can be as simple as starting your day by reading an inspirational story or quote versus listening to the news. I’m not saying bury your head in the sand but be aware of the external stimulus that you’re taking in, it can be deconstructive.
My Own Advisor – what are some triggers for younger investors to re-assess their human capital?
You shouldn’t need to review your insurance policies every week like some people seem to follow the stock market. Once you have a good plan in place, the plan simply requires a bit of maintenance. Consider life-changing events as times to revisit your insurance needs. Things that quickly come to mind are a marriage, a new common-law relationship and children of course. You should also put a home purchase, buying another property, a financial windfall or the imminent need to take care of elderly parents as triggers to re-assess your human capital. All of these life-changing events can either directly or indirectly affect your ability to earn and sustain income.
My wife and I are highly dependent upon our income for the next 10 years to pay off our debts and continue saving and investing for retirement. The thought of not being able to work to do those things are certainly consequences we’re trying to mitigate through holding the appropriate types and amounts of insurance. Ultimately, YOU are the greatest retirement asset. I never really looked at things this way when I was younger but I have a better appreciation of human capital now. How you manage your human capital can make a huge difference in your financial future and for those who depend on you.
How do you view human capital?