Central to the idea of any insurance policy is the fact that the thing being insured has economic and personal value, which is at risk of being lost, damaged, or destroyed. The purpose of the insurance is to replace the economic value of that which is lost, damaged, or destroyed.

In the case home owner's insurance, for example, the thing being insured is the home. What needs to be known is the value of the home. In the case of automobile insurance, what needs to be known is the value of the vehicle being insured. And, in the case of life insurance, what needs to be known is the value of the human life being insured.

This naturally raises the question: What is the economic value of a human being's life?And while many financial planners and insurance agents extol the benefits of buying life insurance, they rarely explain its direct value to you much less the value of your own life.

Instead, they tell you about your “need” for life insurance coverage and how it benefits your family when you die. In many sales presentations, the purchase of life insurance is tied directly into a sense of duty, not value.

And, if you don't purchase life insurance? Guilt.

Perhaps you can hear the insurance salesman ask you from across the table: "You do care about your spouse and kids... don't you?"

Of course you do, so you concede the point and listen to what the agent has to say.

Then, the fun begins. To calculate the amount of life insurance a person should own, most financial planners and insurance agents use something called “needs analysis” or “capital needs analysis.”

Needs analysis is based on the idea that the right amount of life insurance is an amount of capital (savings) your family needs after you die. Implicit in this idea is that your beneficiary's need can be (and often is) something different from your value as a human being, since the concept of Human Life Value in life insurance already addresses that issue (more on that in a moment).

Proponents of needs analysis base their life insurance recommendations on the (often) unstated premise that your value as a human being lies primarily in what you can (or must) provide to your dependents when you die. No dependents, no need for life insurance.

Also implicit in some of the calculations and assumptions is the idea that you can over-insure your life and that life insurance agents might sell you too much life insurance, causing you to overpay for coverage you don’t "need". Because of this, some financial planners and insurance agents attempt to find the “right” insurance amount, which shouldn’t be “too much” nor “too little.”

Human Life Value vs Needs Analysis

Yet another common assumption, which goes hand-in-hand with needs analysis is the idea that you have more responsibilities when you’re young and starting a family and fewer when you’re old.

Your kids eventually move out of the house, and your need for life insurance is said to decrease at this point since they are no longer dependent on you and thus you owe them very little, if anything at all. Plus, your mortgage (and presumably other debts) are paid off when you retire and you have fewer financial responsibilities.

This theory, called the Theory Of Decreasing Responsibility, states that financial responsibilities rise when you’re young and decline when you’re older, and your life insurance coverage should reflect that.

Once you have no dependents, no debts, and few or no liabilities, the proponents of The Theory of Decreasing Responsibility and needs analysis tell you that you have no further need for life insurance.

Supporters of these ideas often cite classic sales texts by A.L. Williams and Primerica, and popular financial gurus like Suze Orman and Dave Ramsey, or one of several studies, including a newer study by Browning, Guo, Cheng, and Finke (Spending in Retirement: Determining the Consumption Gap) and the infamous “Retirement Spending Smile” which purports to show that retirees spend less in retirement and thus need less income, which insurance experts would take to mean they have little or no need for life insurance.

The assumption made by pundits, some financial experts, radio and T.V. personalities, and some investment advisors is that retirees have fewer financial responsibilities, spend less money because of changing priorities, and thus just plain don’t have a need for life insurance.

This is all good news for those promoting needs analysis and The Theory of Decreasing Responsibility.

But, is it good news for the insured policyholder?

Once again, all insurance policies exist to replace that which is lost. Insurance does not exist to enrich the policyholder, but rather to make the beneficiary of the policy whole for a loss suffered.

Homeowner's insurance, for example, replaces damage to a home, up to and including a total loss. Auto insurance replaces parts on a vehicle which have been damaged, up to a total loss of the vehicle.

What is lost when an individual dies?

In a word, income.

More specifically, their income and future earning potential. Life insurance replaces the lost income of the insured person when he or she dies. But it also compensates the beneficiaries for

future income not yet earned. The assumption is that an individual always has earning potential and that earning potential is worth something (which is why it can be insured).

Everyone needs income until they die, which creates an interesting scenario. If a person hypothetically lived forever, they would have an infinite need for income. But the reality is everyone dies. This means everyone suffers a loss of their own life and a loss of some kind of future earning potential... however small that future potential is.Given that insurance's main function is to replace that which is lost, what then can we infer from the needs analysis approach to life insurance?

Well, regardless of circumstance, every individual makes a specific amount of money over their lifetime and no more (and no less). This is, by definition, how much an individual is worth (economically). They cannot be worth more than what their productive potential allows, and certainly they are not worth less than they actually make... else they would be earning less money.

In other words, everyone is worth exactly what they produce.

Perhaps this is offensive to some, but it is — nonetheless — the truth.

And to an intelligent reader, the obviousness of this almost seems silly to mention except in the context of needs analysis, where mathematical calculations assume that it would be prudent to buy less insurance than what an individual is worth.

Would you buy less insurance than what your home is worth? Would you buy less insurance than what your car is worth? The questions answer themselves. And yet, the needs analysis approach to life insurance assumes this is appropriate in the context of life insurance.

Needs Analysis In Practice

OK, but what about the critic's claims regarding lower spending levels, and decreasing responsibilities?

Even if we assumed that the basic premise of The Theory Of Decreasing Responsibility held at least some water, do the facts and available research back up the claim that peoples responsibilities necessarily decrease with age?

If the premise is true, then someone ought to tell seniors their debt woes are “all in their head” and that their financial responsibilities have actually decreased with age.

It’s true that many seniors try to spend less money over time, and the “Retirement Spending Smile" does show a steady decline in spending of 1%-2% per year but then… the “smile” kicks in and retirees start spending more in the latter years of their life… especially after age 85. And, in fact, the spending pattern appears to rise back to age-65 spending levels and beyond in some models and interpretations of the data.

This baffles financial planners, which is precisely why it doesn’t baffle seniors.

Some research done by BlackRock Retirement Institute sheds light on this mystery. After almost 20 years of retirement, most seniors still had 80% of the money they had when they first retired (adjusted for inflation) while one-third of them had increased their net worth.

A similar study done by Vanguard in 2015 showed that seniors with at least $100,000 in assets reinvested roughly 40% of the money they withdrew from retirement accounts.

In other words, people do reduce consumption but they do it in favor of continued saving.

OK but what about their income?

Using publicly-available income tax data from the IRS, Andrew Biggs, of the American Enterprise Institute, demonstrated that so long as people save, retirees have incomes comparable to their younger working-age counterparts (Is There a Retirement Crisis? Examining Retirement Planning in the Household and Government Sectors, Andrew G. Biggs, Oct 2017). Obviously those who do not save do not retire with sufficient income.

OK, but why do they need all this income anyway?

According to a report from the Employee Benefit Research Institute (EBRI) titled, Debt of the Elderly and Near Elderly, 1992–2016, retirees and especially those in advanced age do not necessarily live debt-free lives.

On the contrary. Many of them have substantial financial liabilities and responsibilities.

The study looked at debt of older people two different ways:

• Debt payments relative to income and; • Debt relative to assets.

The EBRI found:

A higher percentage of American families with heads ages 55 or older have debt, and families with the oldest heads are seeing the greatest increases… After 2007, the

increase in debt has been most prevalent among the families with the oldest heads – ages 75 or older – where the percentage having debt has increased by nearly 60

percent (from 31.2 percent in 2007 to 49.8 percent in 2016)… However, debt levels have decreased from their peaks in 2010, but the oldest families still have debt levels

above their 2001 levels… the percentage of families with heads ages 75 or older with debt

payments in excess of 40 percent of income increased by more than 23

percent from 2007-2016.

This, coupled with the “Retirement Spending Smile” data, showing rapid and dramatic increases in spending late in life, tell a very different story than the “decreasing responsibility” narrative.

It seems the research supports the idea that financial responsibilities actually increase with age, not the other way around (at least for some retirees).

But, couldn’t spending patterns hypothetically decrease for older individuals? Sure, but the data shows that, on average, it does not happen for a good chunk of the population.

Whether it’s because people need to go into debt to make up for a lack of savings or whether older people choose to increase debt levels for other reasons, the fact remains that a growing number of older people — in general — do not have decreasing financial responsibilities.

An increasing number of seniors have systematic decreasing, then increasing, liabilities. It's not a "straight shot" one way or another. It's cyclical spending, with the cost of living rising in extreme old age.

OK, but so what? Does any of this matter?

It does, if... you want to save enough, or avoid running out of, money before you die.

And here is where financial planning needs overhauling, especially when it comes to life insurance planning. Needs analysis lives in the realm of the unreal and crumbles under careful scrutiny because its basic premise is incorrect.

Once again, if we travel back to the realm of reality, all insurance (including life insurance) functions to replace that which is lost.

The flaws of needs analysis stem from the fact that these ideas largely ignore the value of the insured individual's life in favor of the needs of dependents, creating an unnecessary and bizarre dichotomy between the needs of the dependent and the value of the policyholder's life.

Apparent in the calculation for life insurance needs is the fact that "need" is arbitrary.

For example, how does one determine a beneficiary's real need? What, exactly is needed versus what would be "nice to have"? If you live in a $400,000 home, do you really need that home

or could you live in a $50,000 bungalow? Does your family really need $20,000 per year of your income, or could they scrape by on $10,000 for the very barest of necessities?

And, more importantly, why is your beneficiary's need more important than your value as a human being?

Aren't you insuring your life because you value them as part of it?

Set aside, for a moment, that most parents recognize and rightly accept they are morally responsible for their defenseless children. How does recognizing and insuring the full value of your life (which your spouse and children are part of) contradict your beneficiary's legitimate financial needs or wants? And, more importantly, if we assume you legitimately love your family, why would you leave them less money rather than more?

This last question is one that has never been answered rationally by proponents of needs analysis and the theorists of decreasing responsibilities. And yet, they have formulated an alternate theory to justify insurance "need" as distinct and separate from the value of human life.

The flaws of needs analysis are not "merely hypothetical." The theoretical flaws result in very practical problems for both the policyholder and the beneficiaries.

Specifically, needs analysis:

1. Assumes your death causes a very specific, static, financial need for your dependents, and thus;

2. Does not account for other financial planning goals you (or your heirs) may have, and does not consider the impact of risk capacityon your future goals. Risk capacity is how much money you must risk in order to meet your financial goals in life (which implies how much money you can afford to lose);

3. Creates a distorted view of your financial situation and also creates a “lopsided” financial plan during various periods of your life. This lopsided plan creates a

situation where your spouse or dependent has a better standard of living if you die than if you live. In situations where a substantial amount of savings has been accumulated, and a substantial amount of term insurance is in-force, you are essentially worth more dead than alive... not from the insurance, but from a combination of the insurance and savings. And yet, when the term policy eventually expires, you suddenly have less insurance than what you’re really worth or what your family might want;

4. Is generally based on deterministic assumptions. It does not consider risk (i.e. the probability of failure). It only assumes everything will work exactly as planned, which is rare. Deterministic modeling creates an illusion of precision — a very scientific looking, but logically (and practically) flawed assessment. In many cases, needs analysis will make unreasonable probabilistic assumptions about the growth and appreciation of your current savings and assets, leaving you under-insured when you die. This is remedied by buying your full human life value in insurance, and using the insurance death benefit as full replacement income, rather than relying on investment gains from a smaller death benefit to make up for shortfalls in income. For example, instead of buying $100,000 of life insurance and assuming an 8% return on that $100,000 (to avoid having to buy more insurance), one is typically better off buying more insurance and making an assumption of a 0% return on the death benefit — using the principal

of the death benefit as income instead of investment gains.

The Value Of Human Life

Needs analysis is, of course, contrasted by the concept of Human Life Value, originally developed by Dr. Solomon Huebner in the early 1900s.

Huebner was widely recognized as the “father of insurance education”… inventing and defining the term “human life value,” which he defined (in his book The Economics Of Life Insurance) as:

…the monetary worth of the economic forces that are incorporated within our being, namely, our character and health, our training and experience, our personality and

industry, our judgment and power of initiative, and our driving force to put across in tangible form the economic images of the mind.

In other words, you have a certain amount of earning potential. Maybe that earning potential is $50,000 per year or maybe it’s $100,000 per year or maybe it’s much, much more.

How are you even capable of earning this kind of money?

Simple.

Human beings (which, presumably, includes you) are incredibly creative. And… we have this really cool ability to take what’s inside our mind and bring it into the real world through a combination of rational thought, initiative and action, and good judgment.

And then… we sell the things we make or help make (either in our own business or while working for someone else) for a profit, make money, and pursue more and more values to make more and more money.

This is true, even if you currently live on “property income” or “investment income.” This is income which is vulnerable to loss if the underlying asset (i.e. the business) craters or even goes through a tumultuous period and loses value (thus decreasing the amount of income you receive or decreasing the total value of the bonds you hold or your ownership in the business).

Despite the gradual, insane, and nonsensical mangling of Huebner's original message (in some cases by his own peers and students), and despite some of Huebner's later contradictions and inconsistencies, Human Life Value is (and has always been), fundamentally, about the economic value of human life and its relationship to productive work.

Where needs analysis quietly assumes your life acquires value in relation to other people (even if those people are your family), a proper and intellectually honest understanding of Human Life Value starts with the premise that your life is economically valuable because you are a productive human being.

... that your "personality and industry," your "judgment and power of initiative," and your "driving force to put across in tangible form the economic images of the mind" is what is of primary importance.

The primary value here is your own life, not someone else’s.

After all, if your life is not the primary value here, what is it that you’re insuring? And, what value could life insurance really have? And what, exactly is your beneficiary receiving if not your future value as a human being? What loss is being replaced and what are they being made whole for?

Again, the person insured in the contract is you, not someone else. Your beneficiaries are people who benefit only after you’re dead. They are, by definition, a secondary concern so long as you are still alive.

It’s true that others may rely on you and benefit from your work. In fact, this true of most people. And, it’s part of the reason why people buy life insurance — because they have dependents who will be financially ruined when they die.

But, even without dependents, individuals have value based on the virtue of their own productiveness and the value of their productive work… work that results in income… income which is earned by the values they produce and freely and voluntarily trade with others.

And... income (and thus value) which can be lost.

In the words of writer and philosopher Ayn Rand,

The virtue of Productiveness is the recognition of the fact that productive work is the process by which man’s mind sustains his life, the process that sets man free of the necessity to adjust himself to his background, as all animals do, and gives him the power to adjust his background to himself. Productive work is the road of man’s unlimited achievement and calls upon the highest attributes of his character: his

creative ability, his ambitiousness, his self-assertiveness, his refusal to bear uncontested disasters, his dedication to the goal of reshaping the earth in the image of

his values. “Productive work” does not mean the unfocused performance of the motions of some job. It means the consciously chosen pursuit of a productive career, in any line

of rational endeavor, great or modest, on any level of ability. It is not the degree of a man’s ability nor the scale of his work that is ethically relevant here, but the fullest and

most purposeful use of his mind.

It is the “creative ability… ambitiousness… self-assertiveness… refusal to bear uncontested disasters… dedication to the goal of reshaping the earth in the image of his values…” which you are protecting when you buy life insurance… it is the recognition that your life — andmore specifically, your productive potential — is valuable and worth protecting against the many and varied uncertainties in life.

That income is the practical proof of your productive work and evidence of yourmind’s ability to transform Rand’s “creative ability… ambitiousness… self-assertiveness… refusal to bear uncontested disasters… dedication to the goal of reshaping the earth…” and Huebner’s “economic images of the mind” into tangible reality…

The fact that you can lose your income, or that your economic potential can be cut short by illness, disability, or death, is what makes Human Life Value and life insurance so powerful... it protects your future earning potential from being lost. It creates certainty out of uncertainty.

Everyone is capable of being productive and thus everyone has potential value worth insuring.To restate, every rational, productive, individual has a calculable economic value… a value which can be destroyed and thus… a value which can be insured against loss.

The loss, of course, is often directly experienced by a spouse, children, siblings, business partners, non-profits or charities that are beneficiaries of your earning capacity while you're still alive. You, of course, suffer the ultimate loss of everything as far as you're concerned — you literally lose your entire life. It's a loss you will never experience after the fact, but aloss nonetheless.

How important that loss is to you is the subtle, often unstated, driving factor determining how much life insurance you will ultimately buy.

Can't You Over-Insure Your Life?

But, can’t you somehow “over-insure” your life? Isn’t this the main reason that The Theory Of Decreasing Responsibility argues that you should do a “needs analysis” — to avoid a greedy insurer from selling you too much insurance?

That financial planners and insurance agents worry about greedy life insurance companies is the primary reason why you shouldn’t.

First of all, a life insurance company will never, under any circumstance, knowingly over-insure you. The reason is simple: there is no profit in selling you too much life insurance.

A life insurance company is on the hook for paying out death claims and thus does not want you to be worth more dead than alive... for what should be obvious reasons.

The very thing that some financial planners and insurance agents hate the most — the profit motive — is precisely what protects you from being overinsured by aninsurance company.

Insurance companies must manage risk to stay profitable, and those risks (i.e. life insurance death benefits) cost money, and… selling you too much insurance creates excess risk that they cannot afford to take. Each death benefit payout costs the insurer money. In essence, the insurer’s job is to take on risk but… not catastrophic risks (catastrophic to theinsurer).

This is why an insurance company will never sell $20 billion of life insurance to an individual with an annual income of $50,000. Even if the policyholder could somehow afford the premiums, the insurer doesn’t want to insure someone for $20 billion whose objective economic value is only $50,000 per year. More to the point, someone earning $50,000 per year cannot afford a $20 billion policy and… it’s incredibly difficult and expensive for an insurance company to secure the guarantees of even a modest life insurance policy. So, they want to make sure the policyholder can afford to pay for the policy (and thus, the transfer of risk to the insurer).

Human Life Value accounts for this fact explicitly by creating a direct link between life insurance and total economic value, which prevents over-insurance.

It also accounts for the fact that individuals can potentially remain productive for their entire life, preventing the opposite problem —under-insurance.

None of this is to say that you are morally or legally required or obligated to buy life insurance. Your decision to buy (or not buy), as well as how much life insurance you buy, is your choice, obviously.

But let’s be real. No one needs life insurance in the arbitrary or dutiful sense. More thanthat, a beneficiary's legitimate needs are not distinct and separate from the economic value of your life, making needs analysis superfluous. People cannot be insured for more than what they

are worth, but they can be insured for less. So, either financialadvisors are willing to underinsure their clients or they are willing to sell their clients full replacement value on their life... again, making needs analysis unnecessary since Human Life Value already addresses this issue.

What, then, is the real purpose of needs analysis and the Theory of Decreasing Responsibility?

Possibly, to mislead and confuse you about the nature of life insurance and how much of it is appropriate to buy. Needs analysis relies on you feeling a sense of duty to your family, whether legitimate or not.

But, fear-based, guilt-tripping, duty-bound, purchases of life insurance are, and have always been, uninspiring. No one wants to be "sold" insurance and even fewer want to buy it under high-pressure sales tactics.

The good news is, life insurance isn't about need or a duty to your beneficiaries. It's about your human life value. When viewed from that perspective, the only thing youneed concern yourself with is: "how much am I worth?"

Buy that amount, and you should be fine.

For more information, go to https://www.monegenix.com/human-life-value/

The original article can be found online at: https://www.linkedin.com/pulse/ignore-experts-life-insurance-isnt-need-david-lewis/