i’ve read this over twice but somehow cant seem to get my head around the following: - If human capital is bond-like, financial capital should be more aggressive… demand for life insurance will be high. what does it mean when they say human capital bond like?? and then the link to life ins?
Use the search function…there are a ton of threads about this.
Human capital bond like = a proefssor at university no matter what he does he will always have a job there and won’t get fired. aka you get your coupon (salary) each time. Demand for lifeinsurance = high because think of it this way… he will never have the potential to make the bill gates salary because he is steady eddy. Life insurance is variable so it replaces that equity component. Now for someone who has an equity like human capital, he already is swinging for the fences, so doesn’t need that life insurance. hope that helps.
human K bond-like means that it’s safe- they always use things like a tenured professor- more or less you’re never going to get fired, prob will stick in same job for career, and your wages will increase at least at the inflation rate or so… just a steady eddy, stable source of income. so now say that’s your job and you have a family to provide for and support. they rely on you and that stable income is how I look at the life insurance thing- so if you drop dead tomorrow, they are in trouble- need or insurance high. As opposed to some hotshot smart dude w/ lots of human K, maybe does start up companies, his wife might expect that sometimes they’ll have earnings, sometimes things will fail, probably isn’t relying on that $$ as much, less need for insurance. i’m sure there are many other ways to think about it, but that works for me. so the boring stable dude since the income is stable would want to be more aggressive w/ their financial portfolio.
super! thanks Soccertom
bannisja, so we should basically look as life ins as a part of our financial capital? also, i read some threads about relationship between age and LI… got more confused since: 1- i thought that … as you get older… your human capital reduces … and need for life insurance also reduces. 2- but then… when probability of death is higher… demand for LI is high. so as you get older … your probability of death increases and therefore your demand for LI shud increase? how can i reconcile my thoughts (1&2)?
amg: Easiest way to think about this is as follows. When you depend on human capital a lot and it is a large proportion of your income then you need to protect it (for your family) with life insurance. But as you age and your human capital becomes less important you really do not need life insurance.(unless you have motives to bequeath) So in effect you need to buy life insurance only to protect your income from human capital.
High HC in early years, low FC in early years…if you die, your family only has that little FC to support them so you’d prefer life insurance so that they’re covered if you kick the bucket. Low HC in later years, high FC in later years…if you die, your family has a lotta FC to support them so you don’t need life insurance to keep them happy. -----------------------------------------