Human Capital: Is Your Client’s Potential Protected?

By John F. Nichols
InsuranceNewsNet Magazine, February 2012

At a Million Dollar Round Table (MDRT) Annual Meeting, noted economist Moshe Milevsky spoke about “human capital” and that struck me as an excellent way for clients to understand their true worth—and what they have to lose.

We work hard to maintain the lifestyle we want, build our nest eggs, save for our kids’ education or, at least, the next version of the iPad. Financially, what are we worth? What’s our net worth? Hopefully, it’s a positive number. But that’s the trap. And just as my father used to say, “First things first,” you also need to build and protect your human capital first and then your financial capital will follow.

So, What is Your Human Capital Worth?

Some clients might be unsure of the answer to this question because they are unsure of what the question is asking.

“Human capital” refers to the stock of skills and knowledge embodied in the ability to perform labor so as to produce economic value. It is the skills and knowledge gained by a worker through education and experience. Therefore, expenditures on education, training and especially medical care are perhaps the most important investments in human capital.

This strategy focuses on the financial aspect of one’s life. By working with your client and creating their balance sheet, you can then lead the client in a discussion of human capital.

First, have the client create their balance sheet using their personal company—Client Name, Inc. Then, list the assets on one side and the liabilities on the other. Do the math to calculate their net worth (assets – liabilities = net worth).

Ask the client, “What’s missing?” (Most clients will have no idea, so help them out.) What’s missing is the client’s human capital. Human capital is calculated as follows: the client’s income multiplied by the number of years they will earn it by working.

For example, the client earns $100,000 a year and plans on working for 17 more years ($100,000 X 17 years = $1,700,000). The calculation could include estimated pay increases, bonus compensation and even a second income. Now ask your client, “Would you be interested in protecting your hope? May I show you an idea on how to preserve your future human capital value?”

Human Capital Case Study

Upon returning from the 2008 MDRT annual meeting, I met with my client Dr. Tom and his accountant, Jim. After a few minutes of discussion, I took out a blank sheet of paper and wrote “Dr. Tom, Inc.” at the top center. On the left side, I wrote “assets” and on the right side, I wrote “liabilities.” I gave it to Dr. Tom and his accountant and requested that they list out the assets and liabilities for “Dr. Tom, Inc.”

After Dr. Tom completed the exercise, I wrote “net worth” at the bottom right of the paper and asked Jim to calculate the net worth of “Dr. Tom, Inc.” He proceeded to write in the number and then handed the paper back to me. With a puzzled look, I asked what we were missing. Dr. Tom wasn’t sure, so I wrote “human capital” with a question mark on the asset side and handed the paper back to him. He didn’t understand what human capital meant. We discussed the value of his income as an asset and the future value of it.

Suddenly the light bulb went on in his head. We multiplied his current income by the number of years he wanted to work. We assumed no increases in salary and still the number surprised him. I then asked Dr. Tom, “Would you be interested in protecting your hope? May I show you an idea on how to preserve your future human capital value?” I do not use illustrations or proposals, or debate on contract language. I simply ask questions to help my clients think about their bigger future and how they may want to protect it.

Is Your Potential Protected?

Human capital is the most valuable asset class on your personal balance sheet. Doesn’t it make sense to protect and preserve all that you have worked for—your net worth and your ability to build your balance sheet—your human capital? Just be sure to remember what my father said, “First things first.” 

John F. Nichols, CLU, MSM is Founder of Disability Resource Group Inc., a provider of disability products and services. He serves as NAIFA Secretary and is a Life and Qualifying MDRT member with two Court of the Table and four Top of the Table honors. John can be reached at [email protected].

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