Protecting Human Capital

Human capital is the stock of knowledge, habits, social and personality attributes which would include creativity, further embodied with the ability to perform labor so as to produce economic value. Said another way, human capital can be looked upon as a collection of resources; i.e., knowledge, talents, skills, abilities, experience, intelligence, training, judgment, and wisdom. Human capital should be viewed as an asset class which has risks associated with it. The two main risks: disability or death and competency.

Protecting your human capital with both life and disability insurance will protect you and your family against any human capital shortfall due to a career-ending illness or accident or an untimely death. If you were to compare the investment of one bond issued by one firm, it would be a corollary to receiving all of a family’s income from one individual. We all know it’s prudent to diversify your securities and other investments; however, absent that ability to do so when comparing human capital as an asset, the purchase of insurance against default would be the next best option. There are three types of insurance to consider in order to protect against human capital. The two most important early on would be life insurance and disability insurance. Long Term Care would follow as it not only protects the human capital but also the emotional and physical consequences of enduring a long term care need.

In essence the purchase of life insurance is no more than hedging one’s mortality risk in an effort to protect the financial dependents. Likewise, disability insurance can hedge against a non-fatal situation.

Due to the longer lifespans individuals suffering a permanent disability or early long term care event are likely to live longer than in the past thus requiring more capital for living expenses. Even a temporary disability, which is not uncommon, can prove disastrous. It is estimated that one in four will be disabled for some period of time prior to retirement.

We often protect our balance sheets with homeowner’s insurance, auto insurance, and liability insurance. It is for the same reasons that life, disability, and long term care insurance will also protect the balance sheet. This is particularly important for those who have not yet accumulated enough financial resources to last a lifetime.