Dr. Solomon Stephen Huebner explained the “economic value of human life” concept in his textbook “The Economics of Life Insurance”. He is well-known for his establishment of the once standard method used by life insurance professionals to calculate income replacement needs for their clients. His concept is still applied today, although his approach has been modified with newer versions. The best way to use life insurance as a perfect income hedge is to replace a percentage of your current annual gross income up to or beyond your retirement age by estimating future income growth, inflation, and taxation. The resulting calculation is the maximum amount of death benefit required from a term life insurance policy to protect your financial future. Income replacement serves the purpose of covering an unanticipated loss of income that occurs due to the untimely death of an immediate family or household member known to cause survivors and financial dependents to experience financial distress. A term life insurance policy is a preferred form of protection for its higher coverage and lower premium when compared to a whole life insurance policy.

In life, as we age, our health is expected to deteriorate while our income is expected to rise. These expectations attribute to the annually increasing cost of life insurance. No one is exempt from the perils of injury, illness, disease, disability, and death, each incurring significant annually increasing economic costs. These exposures can further exacerbate unemployment risk and longevity risk. As a result, the economic value of a human life is equivalent to the economic value of its lost future earning capacity – the decrease in an individual’s ability to earn income. A term life insurance policy is an affordable solution to protect our finances during our working years. However, untimely economic events such as a recession or pandemic can cause us to suffer financial setbacks and force the need to maintain life insurance coverage for our lifetime. Alternatively, whole life insurance is a safer bet, but a more expensive solution over the long-term.

Typically, financial obligations to debts (credit cards, car notes, student loans, and mortgages) and to survivors and financial dependents (spouses and children) begin in early adulthood as we form partnerships, purchase property, and build diverse households. We work to earn a livable wage or stable income while budgeting and contributing to savings and investments which shape our financial future in retirement. Our goal is to accumulate enough assets that generate supplemental income while living and pass on our wealth to generations after death. We incrementally reduce our financial obligations as we pay down debts and raise our households to become financially independent. This decreasing responsibility grants opportunities to save and invest excess income not needed to sustain our household. This infers a lesser need for life insurance over time as we are assumed to have been obtaining enough assets to live off of in retirement. Arthur L. “Art” Williams Jr. implemented this theory when he crafted his initial life insurance business sales pitch “buy term and invest the difference.” This phenomena focuses on conservatively investing the cost-savings of a term life insurance policy relative to a whole life insurance policy over the term of the policy while temporarily protecting the income sources needed to build future wealth.

Contrary to popular belief, selling off assets is uncommon behavior by retirees. Most retirees who preplanned for their financial future can live off guaranteed income sources (cash value of life insurance or fixed-income annuity and pension payments) and are able to continue growing supplemental income sources (dividends, interest, and capital gains realized on retirement portfolio assets). Therefore, it is life critical to protect our sources of income for later consumption. Sufficient retirement savings and an ongoing conservative investment strategy help mitigate longevity risk (the risk of “living too long”) and offset the costs associated with mortality risk (the risk of “dying too soon”). Whole life insurance and a fixed annuity are alternative solutions to help us financially recover while being financially protected for life. As you can see, our sources of income can create a means of spending in retirement without having to continue earning a wage or salary and feeling the need to become self-insured.

It is a well-known fact that individuals tend to reduce their spending in retirement since many do not create enough wealth to maintain their pre-retirement lifestyle. However, research suggests some individuals unintentionally underspend their sources of income in retirement due to progressively increasing retirement portfolio asset returns coupled with the issue of spending less than their income – this effectively creates a “retirement consumption gap”. The more sources of income available in retirement, the higher the probability of not overspending in retirement. However, the supplemental income earned on retirement assets creates a spread between the value of these retirement assets and the insignificant cash withdrawals as a direct result of underspending. This research implies that retirees quickly adjust their spending habits upon retirement age assuming they are unable to predict their future financial needs and behaviors due to the uncertainty of life expectancy, future expenses, and the fluctuating value of assets being left behind to heirs. Income coverage brings all walks of life a peace of mind during all stages of life to reduce the fear of these unknowns.