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Human Life Value

Can anyone put a price on human life? Can the value of human life be quantified?

Everyone in this world is valuable and priceless to himself and his family. Trying to quantify the value of human life may sound ridiculous.

However, the first job of an insurer is to value human life in monetary terms in order to limit the amount of insurance that can be offered to a person. Everyone on the planet wants to insure themselves to the maximum possible limit, and it is the job of insurance companies to draw a line for that limit, and more importantly, to prevent the problem of underinsurance that countries like the United States face right now.

Life Values:

Suppose a person buys a car insurance for Rs. 100,000/- ($2,500) for a car worth Rs. 800,000/- ($20,000). The car had an accident and it was all destroyed. Even if the insurance company paid his claim in full, he would only get 100,000 rupees ($2,500). With that amount, would he be able to buy the car he owned before the accident? The answer to this question is “no” because he is not insured for the total value of his car. In short, the car was not insured for its value, but was underinsured, thereby violating the “principle of indemnity”.

Underinsurance sometimes leaves no trace of insurance when it fails the purpose it affects. In the same way that personal insurance is sought, one should keep in mind the amount of financial loss the family will suffer if the person is not present, and this should be the amount insured. Rather than buying life insurance as a tool for tax cuts, pensions, small-scale investment in the stock market, etc., it is better to seek insurance from the perspective of economic replacement of the value of human life.

The concept of Human Life Value was created in the 1920s by Dr. Solomon S. Huebner, the founder of the “American Association of Life Underwriters”. The HLV concept is used by a variety of professionals, from insurers to courts, to determine the economic value of human life. For the victims of the “terrorist attack of September 11, 2001” on the Twin Towers, the court determined the amount of compensation based on this concept.

Insurance companies use what is known as the human life value concept to calculate a person’s economic worth to their family. The amount the family needs to maintain the same standard of living in the absence of one will be his economic value to the family. Instead, the financial loss to the family after the person dies is his value to the family. This will be the maximum amount a person can seek insurance protection for.

Basically, the value of a human life depends on the earning power of the individual. This is the amount the family will lose in his absence. By applying the so-called concept of life values, it is possible to determine the amount of financial support an individual has for his or her family.

The calculation of the value of human life requires a detailed analysis of many factors. Some of them are –

1. Annual living income

2. Balance of active earning period before retirement

3. Personal Expenses

4. Inflation

5. Future salary increase, etc.

The first step in calculating the value of a person’s life is to determine a person’s annual net income and deduct expenses for his personal use, such as insurance premiums, maintenance costs, income taxes, etc. This amount will be the amount he provides for his family each year. The economic value of this life again depends on the length of his active earning period. Assuming the person is 25 years of age or older, the total annual income after deducting all personal and other expenses is 200,000 rupees (approximately $5,000). Assuming he continues his current job until he retires until he is 55, his household income will continue for 30 years, provided he lives to retire. So if he survives to retirement then the family will get Rs 200,000 for 30 years ie. 200,000 * 30 = 6,000,000 ($150,000). This will be the amount the family will lose as a result of his untimely death.

The value thus derived would be the logical amount a person would need to insure himself if he wanted his family to maintain the same life in his absence. But this again depends on his repayment ability, i.e. he can afford to pay the premium for the Rs 6,000,000 (US$150,000) policy, taking into account his current family needs and circumstances.

HLV calculation method

Method-I: Income Reset Value

This is one of the basic methods of insurance calculation, based on current annual income.

Insurance needs = annual income * remaining retirement years.

If the annual income is 100,000 rupees (2500 US dollars), the age is 35 years old. Assume that the retirement age is 60 and the remaining years of service are 25 years.

Insurance value = 100000 * 25 = 25,00,000 lakhs ($62500).

Method 2: Fixed multiplier

Another insurance calculation method is to apply a fixed multiplier to the annual income. Multiplier based on individual age.

Age range                                     Multiplier
20 - 30			      20
31 - 40 			      18
41 - 50			      15
51 - 60			      10

In the example above, the insurance value would be 100000 * 18 = 1800000 lacs ($45000). If the age is 52 and the annual income is 4 lak ($10,000), the insurance value will be 400000 * 10 = 4000000 ($100,000).

Human Life Value (HLV)

This method of calculating life insurance is based on the contribution a person makes to her/his family in the event of sudden death.

So HLV is defined as the present value of all future income. It also includes other fringe benefits, minus personal expenses, life insurance premiums and taxes.

Let us see this example for better understanding −

“X” age: 40 years old

Retirement age: 60 years old

Current salary: 300,000 per year (expected to remain the same)

Personal expenses: 125000

Net contribution to family: 175,000 (300,000 – 125,000 )

Suppose “X” died at the age of 40.

Lost income for family: 175000 * 20 years (60 – 40) * discount rate for 20 years

(Current value coefficient): 1900000

HLV calculation methods used by some major insurance companies:

ICICI Prudential Life :

HLVs are based on:

age

retirement age

Financial Assets (TA)

Liabilities (TL)

Cash inflow

% increase in revenue flow (assuming a fixed rate)

Existing SA (SA)

Add SA = CPRO + TL – TA – SA

CPRO – Capital Needed to Protect Your Lifestyle

MetLife – HLV Calculator:

HLVs are based on:

current age

expected retirement age

Annual income

increase every year

extra benefits

Tax bracket/rate

Monthly Expenses (Own Expenses)

return on investment

current life insurance

The value of a person’s life estimated by either of the above processes minus the amount of insurance currently in effect yields the amount of additional coverage that person must take out to cover his/her future needs and his/her family’s/her untimely death.

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