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Preserving Your Client’s Human Capital Value

Use this concept to help your clients establish a sound financial plan.

By John F. Nichols, CLU

As professional financial advisors, our job is to guide our clients in establishing and maintaining a financial plan that is customized to their lifestyle and life goals. To do so, I begin by asking my clients thought-provoking questions to help them start thinking and ultimately help them determine the answers. One such question is: 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.

Understanding human capital
At the 2008 MDRT Annual Meeting, there was a presentation by Moshe Milevsky, professor at York University, Toronto, Canada, on human capital and the role of life insurance in protecting it. In my mind, I turned it around and focused on the role of income protection in preserving that capital.

Upon returning from the MDRT meeting, I had a meeting with a client I’ll call Jim. After a few minutes of discussion, I took out a blank sheet of paper and wrote “Jim, Inc.” at the top center. On the left side, I wrote assets and on the right side I wrote liabilities. I gave the sheet of paper to Jim and asked him to list the assets and liabilities for “Jim, Inc.”

We have the power of the question, the magic of an idea and the products to promise our clients’ hopes and dreams.

After he completed the exercise, I wrote net worth at the bottom right and asked Jim to calculate the net worth of “Jim, Inc.” He proceeded to write in the number and then handed the paper back to me. I asked him what we were missing.

Jim 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 him, “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.

As financial advisors and insurance professionals, we have the power of the question, the magic of an idea and the products to promise our clients’ hopes and dreams.

Balance Sheet of You, Inc.
Assets Debts and Liabilities
Bank accounts Mortgage
House Credit cards
Stocks and bonds Student loans
+ Human capital
Note: Human capital is converted to financial capital as you age.
Assets + human capital - debts and liabilities = Net worth

Human capital is the most valuable asset class on your personal balance sheet.
Source: Moshe Milevsky, professor at York University, Toronto, Canada

NAIFA member John F. Nichols, CLU, is a nine-year MDRT member with two Top of the Table and four Court of the Table honors. He has spoken at more than 300 insurance company meetings, including MDRT meetings. Nichols is the president of Disability Resource Group, Inc. in Chicago. He is also a member of Advisor Today’s Editorial Advisory Council.


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