My understanding of the logic is the following: if your income volatility is high, it limits your future spending planing, the present value of your future expenditures is lower and thus you need less insurance to cover it when you buy an insurance you insure your life or the stream of future income per se, not its volatility… thus, the level of volatility impacts the amount to hedge
Maybe just remove the volatility part of it for sake of understanding. Now lets consider 2 cases below: Case 1: I earn $18,000 a year (mening PV of my Human Capital is very low). Me and my family live in dire conditions. If I die tomorrow, my family’s condition will not be so much worse off as it is when I am alive today. Case 2: I earn $500,000 a year (meaning, PV of my Human Capital is relatively very high). Me and my family is used to living a lavish life style. If I die tomorrow, the stop on $500,000 every year will make a LOT of difference in the way my family has lived so far. So, higher the PV of human capital, higher is the need for life insurance (to substitute it). Now, PV can be high because you are actually earning high or it could be high because though you are earning relatively lower, but your earning volatility is lower. Hope this makes sense.
I think of it this way: If my human capital volatility is high (i.e - I work in a very risky environment where I could either make a lot or go home), then I’m most likely to be the guy who is risky by nature and confident that even if my career is volatile, I’ll still bounce on my feet and hit it big. Having this attitude dismisses the thought of paying for life insurance because hey, I’m the guy that’s going to hit it big anyway, and the insurance money is pocket change for the lifestyle I’ll be living. Now, if I’m a professor who makes a stable salary and benefits, my human capital volatility is low, but I’m still nervous something might happen because I’m the guy that enjoys being risk-averse, so I might as well buy some life insurance should something happen. Hopefully that explains it a bit.
I should prob read the CFA text before posting questions like this, but overall - some good discussion came out of it… Page 335 CFA text - vol 2: “…contrary to intuition”…a higher HC correlation with subindex (equity-like HC), reduces the demand for life insurance. They recognize that this is counterintuitive…works for me.