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Not sure to have seen something about the correlation in between them, although I would think if they are highly correlated it would increase your need of life insurance as you may loose everything at the same time.
But would life insurance even be applicable in this scenario? Life insurance is supposed to be a means of ensuring that the person’s family would not suffer due to the loss of his HC (due to his untimely death), not as a means of supplementing your existing income. I distinctly remember reading this in the curriculum.
Generally, HC and FC would be highly correlated if the person was heavily investing in equities (FC) and his job was, say, an equity trader. In such a case, he would have to be advised to move his FC to fixed-income securities, so that, in a scenario where the equity market fell and he doesn’t get any variable pay (reducing his HC), the bonds would counter his loss in HC as there tends to be a flight to FISs when equity markets suffer a downturn.
More life insurance; if both go down at the same time, and u r dead ; the proceeds help family
if both go up and u r dead; hey bonus time man 
^ oh yeah, that makes sense! That’s why you never tell the Missus when you’ve taken out a life insurance policy.
If HC and FC are highly correlated, the need for life insurance _ decreases. _ Higher correlation results in a riskier portfolio, and a higher discount rate used to compute the PV of human capital. Thus, the higher discount rate results in a smaller PV of human capital, and less need for insurance–becuase life insurance is used to make up for HC shortfalls.
This is unintuitive but correct. This exact question was on the sample exams.
This is absolutely correct, and I wouldn’t call it unintuitive at all. If this was an essay question, this is the answer that’d get you full marks. I gotta tip my hat to ‘IHateMyLIFO’ because if not for this post, anyone reading this forum would’ve assumed the above posters were correct. Cheers bud
Thanks, I try. The concept makes since when you think about it–it’s just not the first conclusion that jumps into your head when you think of higher correlations, so I understand where the confusion comes from.
HC that is highly correlated with your FC might be similar to having a salary that is equity like/correlated to market. Higher FC means you prefer less life insurance.
I use the acrnoym BARFS:
Bequest motive - increased motive increased life insurance
Age - younger the age increased life insurance
Risk tolerance - lower the risk tolerance increased life insurance
Financial Capital - lower the amount increased life insurance
Survival probaiblity - lower the probability increased life insurance