lcai

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.