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Human Life Value
Can anyone put a price tag on human life? Is it possible to measure the value of human life?
Every person in this world is precious and invaluable to himself and his family. Trying to measure the value of human life may seem ridiculous.
But an underwriter’s primary job is to value human life in terms of money to limit the amount of insurance that can be awarded to a person. Every person on this earth wants to insure himself for the maximum possible limit and it is the job of the insurance company to cut a line for this limit and most importantly to protect from underinsured problems, which is countries like America. Facing now.
Concept of human life value:
Suppose a person buys car insurance worth Rs.100000/- ($2500) for a car worth Rs.800000/- ($20000). The car is involved in an accident and is completely damaged. Even if the insurance company fully honors his claim, he will receive only Rs.100000 ($2500). Will he be able to buy the 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 total value. In simple words, the car was not insured for value, but underinsured, defeating the “principle of indemnity”.
Under-insurance sometimes leaves no trace of insurance when it fails to serve the purpose for which it was effected. In the same way, taking into account the financial loss caused by the family without this person, the insurance of human life should be sought and that amount should be insured. Instead of buying life insurance policies as a tool to reduce tax liability, provide for old age, invest in the stock market on a small scale, it makes sense to look at insurance from the perspective of financial replacement of the value of human life.
Human life value concept In the 1920s, the founder of ‘The American College of Life Underwriters’ Dr. Solomon S. Founded by Huebner. The HLV concept is used by various professionals such as underwriters, courts, etc. to determine the economic value of human life. For victims of the ‘September 11, 2001 terrorist attacks’ on the Twin Towers, the court determined the amount of the settlement based on this concept.
Insurance companies use the concept of human life value to calculate the economic value of a person’s family. An individual’s economic value to the family would be the amount needed by the family to maintain the same standard of living in his absence. Rather, the financial loss of the family due to the death of the individual is the cost to his family. This will be the maximum amount for which a person can seek insurance cover.
Generally, human life value is based on a person’s earning capacity. This is the amount the family would lose in his absence. By applying the concept of human life value, the amount of financial support an individual provides to his family is determined.
Calculation of human life value requires detailed analysis of many factors. Some of them are-
1. Life annuity
2. Remainder of active earning period until retirement
3. Personal expenses
5. Future increase in salary, etc.
The first step for calculating human life value is to determine the net annual income of a person after deducting the amount he spends on insurance policies premiums, maintenance expenses, income tax, etc. for his personal use. The amount he spends on his family annually. The economic value of this life again depends on the length of its active earning period. Suppose a person is 25 years old and after deducting all his personal and other expenses his annual income is Rs. 200,000 (around $5000). Assuming she continues in her current job until age 55, her family’s income will continue for 30 years if she survives until retirement. So, if he lives till his retirement, the family will get Rs 200,000 for 30 years, ie. 200,000 * 30 = 6,000,000 ($150,000). This would be the amount the family would lose in his untimely death.
The value thus arrived at would be the logical amount for which a person would need to insure himself, if he wanted his family to maintain the same standard of living in his absence. But this again depends on his repayment capacity, that is, his ability to pay the premium of an insurance policy of Rs.6,000,000 ($150,000) considering his current family needs and circumstances.
HLV calculation methods
Method – I: Income Replacement Value
This is one of the basic methods of insurance calculation and is based on current annual income.
Insurance Requirements = Annual Income * Number of Years Remaining for Retirement.
If annual income is Rs.100000 ($2500) and age is say 35 years. Assuming the retirement age is 60 years, the remaining years of service is 25 years.
Insurance Value = 100000 * 25 = 25,00,000 Lakh ($62500).
Method II: Constant Multiplier
Another method of insurance calculation is to apply a fixed multiplier to the annual income. A multiplier based on the person’s age.
Age range Multiplier
20 - 30 20
31 - 40 18
41 - 50 15
51 - 60 10
In the above example the sum assured would be 100000 * 18 = 1800000 Lakhs ($45000). If the age is 52 years with an annual income of 4 lakhs ($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 a person’s contribution to his/her family in case of accidental death.
HLV is therefore defined as the present value of all future income. It also includes other fringe benefits, less personal expenses, life insurance premiums and taxes.
Let’s see this example for better understanding-
Age of ‘X’: 40 years
Retirement age: 60 years
Current Salary : 300000 per annum (expected to remain the same)
Personal Expenses: 125000
Net Contribution for Family: 175000 (300000 – 125000)
Suppose ‘X’ dies at the age of 40 years.
Income foregone by family : 175000 * 20 years (60 – 40) * Discount rate for 20 years
(Present Value Factor): 1900000
HLV calculation methods adopted by some major insurers:
ICICI Prudential Life:
Based on HLV:
Financial Assets (TA)
% of increase in income flow (assuming fixed spread rate)
Addl SA = CPRO + TL – TA – SA
CPRO – Capital is needed to maintain a lifestyle
MetLife – HLV Calculator:
Based on HLV:
Estimated age of retirement
Monthly Expenses (self)
Investment return rate
Current life insurance
The human life value estimated through any of the above processes with the current in-force sum assured gives the additional sum assured that the individual has to take for his/her future needs and his/her family in his/her case. / His unfortunate demise.
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