What is the biggest risk a person

faces?
 Personal Risk
• The exposures that arise in connection with an
individual’s income
• The concept of present value and why it is
important in measuring life values
• The human life value concept
• How various lifestyles affect the risk of loss
from premature death
• The process of needs analysis
 Personal Risk
• The sources of protection that may be
available to an individual as protection in the
event of premature death
• How the risk of disability differs from the risk
of premature death
• The relationship between the risk of
premature death and superannuation
 Income loss
• Risk with the greatest potential severity for the
individual and the family unit:
• The loss of income.
• A well-ordered personal insurance program
should begin with protection of the individual’s
most valuable asset - income-earning ability.
• It is foolish to insure the property a person owns
while neglecting to insure the asset that
produces the property – human capital
 Measures
• Social security
• Health insurance
• Disability insurance
• Workers compensation (riesgo de trabajo)
• Employer provided life insurance
• Government or private?
 Two mutually exclusive risks
• Premature death and superannuation.
• Premature death occurs when the death
takes place while others remain dependent
on the individual’s income.
• Superannuation is the risk of outliving one’s
income, that is, the risk of retiring without
adequate assets to cover living expenses
during the period of retirement.
 Early vs late deaths
• The risk of premature death and the risk of
superannuation are competing and diametric
needs.
• If the individual dies prematurely, he or she will
have no need for funds that were being
accumulated for retirement.
• If the individual lives until retirement, provision
made for premature death will not be used.
 Who needs premature death protection?

• When no one is dependent on the individual

and his or her death will not deprive anyone,
there is no risk of financial loss, and protection
against premature death is unnecessary.
• If life insurance protection is not needed, then
one can do better by buying other kinds of
protection for retirement
 Objectives
• The first objective in managing personal risks is to
avoid the deprivation of the individual and those
dependent on him or her in the event of a loss that
causes the termination of income.
• Achieving this objective generally means making
arrangements to replace the income that would be
lost as a result of death, retirement, disability, or
unemployment.
• Insurance is a common approach to replacing such
income.
 Objective
• Maximizing estate transfer
• Educating children
• Educating grandchildren
• Charity
• Pets
 Perils
• Death
• Superannuation
• Disability
• Unemployment
 Risk management of premature death
• Death can be a source of loss in two ways.
• The first is in triggering the expenses associated with
death itself.
• These consist primarily of funeral costs, payment of
debts owed by the individual, and death transfer
costs such as the cost of probate and estate taxes.
• The second loss occasioned by death is the loss of
income that would have been earned by the
deceased.
 Identifying risk associated with death
• The essential ingredient in the risk of income loss
due to premature death is the existence of someone
who would suffer deprivation as a result of the
individual’s death.
• The first step in determining whether the risk of lost
income exists, then, is to determine whether anyone
will suffer deprivation as a result of the death.
• When no one will be deprived of income as a result
of death, there is no risk of financial loss due to
premature death.
 Who bears the cost
• The expenses that arise directly from an
individual’s death, such as burial expenses,
can be funded out of assets owned by the
individual at the time of death.
• If the deceased had no assets at the time of
death, burial costs must be paid by survivors
or by the state.
 Measuring Risks Associated
with Premature Death
• Two approaches have been suggested to evaluate
the risk of premature death: human life value and
needs analysis.
• The human life value concept focuses on the
earnings of the individual that would have been lost
in cases of premature death.
• Needs analysis, on the other hand, focuses on the
income and cash needs that must be met following
an individual’s premature death and compares those
needs to resources already available
 Human life valuation
• The human life value is based on the
• individual’s income-earning ability
• It is the present value of the income lost by
dependents as a result of the person’s death.
• Economic value
• Opportunity cost
• It is dependent on the human capital
 Human value
• Consider a 25-year-old person, who we will assume
plans to work until age 65.
• If we estimate that his or her average earnings will
be $60,000 annually and that two-thirds o this total
figure, but by the amount that, invested at some
conservative rate of interest, would yield an income
of $40,000 per year for 40 years.
• If the income will be consumed by dependents, the
individual’s economic value to dependents is $40,000
a year for 40 years.
 Present value
• We could compute this amount by discounting the
$40,000 in each year by the appropriate rate for that
year.
• Alternatively, we can consult a table which indicates
the present value of $1 each year for different
numbers of years.
• A present investment of $15.046 will yield an income
of $1 per year for 40 years, assuming a 6 percent
interest rate.
• Thus we need $601,851
 Limitations of this method
• Human life valuation is problematic
• Does career value stay constant?
• Does the requirement of dependents stay
constant?
• If there is no dependent, there is no need for
any of this
 Needs Analysis
• Needs analysis has three basic steps.
• The first step is to identify the needs that would arise or
continue to exist following the death of the individual.
• Second, resources already available to meet those
needs must be identified. Potential resources at death
might include savings, employer-provided life
insurance, and various social insurance programs.
• Finally, the difference between needs and available
resources represents unmet needs, and life insurance is
one tool that may be used to meet this remaining need.