“Achieving the highest possible return on human capital must be everybody’s goal”…….Brian Tracy
We coin the word ‘Human Capital’ to areas relating to Human Resources; Personnel Management; Labor Relations etc. However, our online helper; Wikipedia, defines Human Capital as “the stock of knowledge, habits, social and personality attributes, including creativity, embodied in the ability to perform labor so as to produce economic value.”
However, in areas relating to wealth management, Human Capital is simply put as ‘the present value of a person’s future expected income. Trust me the maths to this definition is super complicated but if you are so good with numbers, you can google it out.
At every point in time, a person’s total wealth is the summation of his/her Human Capital and Financial Capital. While Human Capital is a bit subjective, Financial Capital is very much quantifiable. It’s the total value of all the financial assets owned by the person. Let’s bring this to life by giving the person a name – Jack Robinson.
At an early stage in Jack’s career, given that Jack is well grounded and rounded in knowledge, his Human Capital will constitute larger proportions in his total wealth. His Financial Capital will be relatively small because he will be saving less due to his high cost of living compared to his income. Financial Capital can also be said to be the accumulation of savings over a given period. As Jack progresses in his career and as his cost of living stabilizes, he begins to save more, hence, increasing his Financial Capital. Also, as time progresses, his Human Capital begins to drop due to the reduction in time to which the future expected incomes will be earned.
For young people with Human Capital constituting a larger proportion of total wealth, there should be concerns about how best to preserve it from unforeseen, uncalculated, and unwarranted events and circumstances such as death. The risk or uncertainty arising due to death is known Mortality Risk. Financial experts have opined that the perfect hedge to mortality risk associated with Human Capital is the purchase of a Life Insurance contract. The reasons are that both the Human Capital and the Life Insurance have negatively correlated payoffs over a given period.
Okay, let’s put this into perspective. Jack, aged 28, working as a Petroleum Engineer at Saudi Aramco with lots of prospects to become the Director of Exploration. Regardless of his huge labor income and high savings now, his Human Capital still constitutes a larger part of his total wealth. Also, Jack decides to take up a Life Insurance contract with a sum assured of $ 100,000,000.00 and he diligently pays his annual premium to the insurance company. Let’s speed time forward into year 5, if Jack is still alive, he would still be benefiting from his Human Capital (payoff). However, if an uncertain event such as death has occurred, his dependents would have made a claim on the sum assured and be benefiting from the life insurance contract (payoff). Hence, dead or alive at any point in the future, Jack and his dependents are financially covered. In economic terms, Jack’s utility of wealth is maximized either dead or alive.
Consequently, I believe we all should embrace Insurance. Pick up a Life Insurance today and safeguard the lives of your own – our families. Don’t let your most valuable asset; Human Capital, go to waste. We all have worked endlessly to be who we are today. GET INSURED!!!!