Global Courant
Can anyone put a price tag on a human life? Is it possible to quantify the value of human life?
Every human being in this world is valuable and priceless to himself and his family. Attempting to quantify the value to human life may sound ridiculous.
But it becomes an insurer’s main job to evaluate a human life in monetary terms, to limit the amount of insurance that can be provided to an individual. Every person on this earth would like to insure themselves for a maximum possible limit and it is the job of the insurance company to draw a line for this limit and more importantly to protect against underinsurance problems which countries like America are now faced.
Concept of human life value:
Let’s assume a person buys a car insurance policy of Rs.100000/- ($2500) for a car worth Rs.800000/- ($20000). The car gets into an accident and is totally damaged. Even if the insurance company fully honors his claim, he will only get Rs.100000 ($2500). Can he buy the same car he had before the accident with this amount? The answer to this question would be ‘No’ because he has not insured his car for its gross value. Simply put, the car was not insured for what it was worth, but underinsured, defeating the “indemnity principle”.
Underinsurance sometimes leaves no trace of insurance when it fails to fulfill the purpose for which it was performed. Similarly, life insurance should be sought considering the financial loss the family would suffer in the absence of this person and that should be the amount of the insurance. Instead of buying life insurance as a tool to reduce tax liability, provide old-age benefits, enter stock markets on a small scale, etc., it would make sense for insurance to be sought from the point of view of economic substitution of the value of human life.
The Human Life Value concept was founded by Dr. Solomon S. Huebner, the founder of ‘The American College of Life Underwriters’, in the 1920s. HLV concept is used by various professionals such as insurers, courts, etc. for determining economic value for a human life. For the victims of the ‘Terrorist attack of September 11, 2001’ on the Twin Towers, courts have determined the amount of the settlement based on this concept.
Insurance companies use what is known as the HUMAN LIFE VALUE concept for calculating the economic worth of a person to their family. The amount that the family would need to maintain the same standard of living in the absence of a person is his financial value to the family. On the contrary, the financial loss of the family upon the death of the person is his value to his family. This would be the maximum amount for which an individual can apply for insurance protection.
In short, the value of human life is based on the earning capacity of the individual. It is the amount the family will lose in his absence. By applying what is termed as Human Life value concept, the amount of financial support the person gives to his family is determined.
Calculating the value of a human life requires a detailed analysis of many factors. Some of them are –
1. Annual Lifetime Income
2. Active Earning Period Balance to Retirement
3. Personal Expenses
4. Inflation
5. Future salary increase etc.
The first step towards calculating the value of human life would be to determine the person’s net annual income after deducting the amount he has spent for personal use, such as premium for insurance policies, maintenance costs, income tax, etc. This amount will be the amount he donates to his family each year. The economic value of this life in turn depends on the length of its active earning period. Let us assume that the person is 25 years old and his annual income after deducting all his personal and other expenses is Rs.200,000 (about $5000). Assuming he kept his current job until retirement until age 55, his income for his family would continue for 30 years, provided he survives to retirement. So if he survives till retirement then the family would get Rs.200,000 for 30 years ie. 200,000 * 30 = 6,000,000 ($150,000). This is the amount the family will lose upon his untimely death.
The value thus obtained would be the logical amount for which a person would have to take out insurance if he wanted his family to maintain the same status of life during his absence. But this again depends on his repayment capacity i.e. his ability to pay premium for the insurance policy in the amount of Rs.6,000,000 ($150,000) considering his current family requirements and circumstances.
Methods for HLV calculation
Method – I: Income Replacement Value
This is one of the basic methods of insurance calculation and is based on current annual income.
Insurance needs = annual income * number of years left until retirement.
If the annual income is Rs.100000 ($2500) and the age is 35 years old for example. Assuming a retirement age of 60, the balance of years of service is 25 years.
Insurance value = 100,000 * 25 = 25,00,000 lacs ($62,500).
Method II: fixed multiplier
Another calculation method for insurance is by applying a fixed multiplier to the annual income. Multiplier based on the age of the individual.
Age range Multiplier20 - 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). For example, if the age is 52 years old with an annual income of 4 lacs ($10,000), the insurance value would be 400,000 * 10 = 4,000,000 ($100,000).
Human Life Value (HLV)
This method of calculating life insurance is based on the contribution one makes and would have paid to her/his family in case of sudden death.
Thus, HLV is defined as the present value of all future earnings. It also includes other benefits, less personal expenses, life insurance premium and taxes.
Let’s look at this example for better understanding-
Age of ‘X’: 40 years
Retirement age: 60 years
Current Salary: 300000 per year (expected to stay the same)
Personal expenses: 125000
Net contribution to family : 175000 (300000 – 125000 )
Suppose ‘X’ dies at the age of 40.
Loss of income by the family : 175000 * 20 years (60 – 40) * discount rate for 20 years
(Actual Value Factor): 1900000
HLV calculation methods used by some of the leading insurers:
ICICI Prudential Life:
HLV based on:
Age
Retirement age
Financial assets (TA)
Liabilities (TL)
cash inflow
% increase in income flow (assuming a fixed incoming rate)
Existing SA (SA)
Addl SA = CPRO + TL – TA – SA
CPRO – Capital required to protect lifestyle
MetLife – HLV Calculator:
HLV based on:
Current age
Expected retirement age
Annual income
Annual increase
Fringe benefits
Tax band/rate
Monthly Expenses (self)
Investment return
Current life insurance
The value of human life estimated through any of the above processes LESS the current insured amount gives the additional insurance amount to be taken out by the person for his/her future needs and for his/her family in case of his/her her unfortunate death.
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