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Where Advisors Need To Focus: The Value Of A Human Life

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Winston Churchill said this about using life insurance to protect the economic value of a human life: “If I had my way I would write the word insurance over the door of every house because I am convinced that for the sacrifices which are considerably small, families can be secured against catastrophes which would otherwise smash them up forever.”

The political commentator, humorist and international celebrity Will Rogers said this: “A man who dies without adequate life insurance should have to come back and see the mess he created.” Rogers later died, in 1935, in a plane crash in Barrow, Alaska–and life insurance benefits were one of his estate’s largest and most important assets.

Yet today, government statistics show that average Americans are purchasing less life insurance than ever as a means of protection and thrift. About 68 million Americans have no life insurance whatsoever, according to LIMRA International, Windsor, Conn.

Life insurance purchases as a percentage of the population probably peaked in 1950. In that year, with the total U.S. population at 150 million, Americans purchased 20 million policies. This means that roughly 13% of the population purchased life insurance that year. In 1980, the population had grown to 226 million, but Americans bought only 17 million policies–roughly equivalent to 7.5% of the population. By 2004, the population hit 293 million, but Americans only purchased 12.5+ million policies, so roughly 4.2% of the population bought new life policies that year. (Population data from the U.S. Census Bureau. Policy purchase data from LIMRA and National Association of Insurance Commissioners.)

Life insurance is not only a way to protect dependents in the event of a premature death; permanent cash value life insurance is used consistently throughout world economies as a core component of the overall savings strategies and as a retirement funding instrument.

Yet Americans are some of the worst savers in the industrialized world. Statistics from the International Monetary Fund in 2005 show that the Japanese save as much as 30% of their income; the Italians, Germans and Canadians, as much as 20%; and the British, 10% to 15%. By comparison, the actual savings rate in America was negative, -1.7%. Of the Americans who do save, a good many send discretionary money into mutual funds, which lack the guarantees of life insurance.

Financial advisors need to get back to the fundamentals of economic replacement of human life value when advising clients about life insurance purchases. Advisors also need to re-educate consumers about the value of life insurance as a proven methodology to save money.

This requires standing strong and reaffirming that the golden goose that lays the golden eggs is indeed more important than the golden eggs.

Always think in terms of the economic replacement value of a human life versus simplistic formulas using multiples of income and so on. Consult with home office underwriting guidelines and software programs which simplify the calculations.

Remember, whether one dies of cancer or a freak accident, the economic loss is always the same, and regrettably final.

Economists have written extensively on the value of a human life and how life insurance purchases should reflect replacing the economic value of a life. Solomon S. Huebner, one of the fathers of financial planning in America and author of The Economics of Life Insurance, maintained that economic replacement of human life value is the ideal way to think of life insurance purchases. Economists Laurence J. Kotlikoff of Boston University and B. Douglas Bernheim of Stanford have also written extensively about the human life value as a methodology to purchase life insurance.

Court rooms throughout the United States have consistently reaffirmed the economic value of a human life in wrongful death cases. An extreme example occurred in 2005, when a pharmaceutical giant had to pay a plaintiff $24 million for her pain and suffering, and an additional $229 million for punitive damages. The reward she received was a form of life insurance.

Lastly, to reaffirm the human life or economic replacement value of a life as it pertains to life insurance, look no further than the 9/11 Victims Compensation Fund. The VCF reports that the United States Treasury paid out over $6 billion in life insurance payments to more than 2,900 beneficiaries. Although the payments did not come from a life insurance company, awards were indeed life insurance payments as they were received income tax-free. Congress mandated that payments were to be based upon the economic replacement of a human life.

Barry J. Dyke is president and founder of Castle Asset Management, LLC, Hampton, N.H. His e-mail address is [email protected].


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