Can any one put a price tag on human life? Is it possible to quantify the value of Human life?
Every human in this world is valuable and priceless to himself and his family. An attempt to quantify the value for human life may sound ridiculous.
But it becomes the foremost job of an underwriter to evaluate a human life in terms of money, in order to restrict the amount of insurance that can be provided to a person. Every person on this earth would like to insure himself for a maximum possible limit and it is the job of the insurance company to cut a line for this limit and all the more important is to safeguard from under-insurance problems, which countries like America are facing now.
Concept of Human Life Value:
Let us assume that a person purchases a car insurance of Rs.100000/- ($2500) for a car which is worth Rs.800000/- ($20000). The car meets with an accident and is totally damaged. Even if the insurance company honors his claim fully, he will get only Rs.100000 ($2500). With this amount will he be able to purchase the same car which he was having before the accident? The answer to this question would be ‘No’, because he has not insured his car for its gross worth. In simple terms, the car was not insured for what it was worth, but under-insured thereby defeating the “Principle of Indemnity”.
Under-insurance at times leaves no trace of insurance when it fails to serve the purpose for what it was effected. In the same way insurance on Human Life should be sought keeping in mind, the financial loss that the family would suffer in the absence of this person and that should be the amount of insurance. Instead of buying Life insurance policies as a tool for reducing tax liability, provision for old age, to venture into stock markets on a small scale etc, it would make sense if insurance is sought from the angle of economic replacement of human life value.
Human Life Value concept was founded by Dr. Solomon S. Huebner, the founder of ‘The American College of Life Underwriters’, in the 1920’s. HLV concept is used by various professionals like Underwriters, Courts, etc. for determining the economic value for a Human Life. For the victims of the ‘Terrorist attack of September 11, 2001’ on the twin towers, courts decided the amount of settlement based on this concept.
Insurance Companies use what is known as HUMAN LIFE VALUE concept for computing the economic value of a person to his family. The amount that the family would require to retain the same standard of living in the absence of a person will be his financial value to the family. On the contrary the financial loss of the family on the death of the person is his value to his family. This would be the maximum amount for which a person can seek insurance protection.
Basically, human life value is based on the individual’s earning ability. It is the amount that the family will lose in his absence. By applying what is called as Human Life value concept, the amount of financial support given by the person to his family is determined.
Computation of Human Life value requires a detailed analysis of many factors. Some of them are –
1. Annual Income of the life
2. Balance of active earning period till retirement
3. Personal Expenses
5. Future increase in salary, etc.
The first step towards computation of Human life value would be to determine the net annual income of the person after deducting the amount spent by him for his personal use like premium for insurance policies, maintenance expense, income tax, etc. This amount will be the amount that he affords to his family annually. The economic value of this life again depends on the length of his active earning period. Let us assume that the person is 25 years of age and his annual income after deducting all his personal and other expenses sums up to Rs.200,000 (around $5000). Assuming that he would continue with the existing job till his retirement up to an age of 55 years, then his income to his family will continue for 30 years, provided he survives till retirement. So, if he survives to his retirement, then the family would get Rs.200,000 for 30 years, ie. 200,000 * 30 = 6,000,000 ($150,000). This will be the amount that the family will lose on his premature death.
The value thus arrived would be the logical amount for which a person needs to insure himself, should he want his family to maintain the same status of living in his absence. But this again depends on his repaying capacity, that is his ability to pay premium for the Insurance policy for an amount of Rs.6,000,000 ($150,000), keeping in mind his present family requirements and circumstances.
Methods of HLV computation
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 for retirement.
If the annual income is Rs.100000 ($2500) and the age is say 35 years. Assuming the retirement age as 60 years the balance years of service is 25 years.
Insurance value = 100000 * 25 = 25,00,000 lacs ($62500).
Method II: Fixed Multiplier
Another method of insurance calculation is by applying a fixed multiplier on the annual income. Multiplier based on the age of the individual.
Age range Multiplier
20 - 30 20
31 - 40 18
41 - 50 15
51 - 60 10
In the above example the insurance value would be 100000 * 18 = 1800000 lacs ($45000). If the age is say 52 yrs with an annual income 4 lacs ($10,000) the insurance value would be 400000 * 10 = 4000000 ($100,000).
Human Life Value (HLV)
This method of calculating life insurance is based on contribution that one makes and would have made to her/his family in case of sudden demise.
So HLV is defined as the present value of all future income. It also includes other fringe benefits, less personal expenses, life insurance premium and taxes.
Let’s see this example for better understanding-
Age of ‘X’ : 40 yrs
Retirement age : 60 yrs
Current salary : 300000 per annum (expected to remain same)
Personal expenses : 125000
Net contribution to family : 175000 (300000 – 125000 )
Suppose ‘X’ dies at the age of 40.
Income lost by the family : 175000 * 20 yrs (60 – 40) * discount rate for 20 yrs
(Present value factor): 1900000
HLV calculation methods adopted by some leading Insurers:
ICICI Prudential Life :
HLV based on :
Financial Assets (TA)
% of increase in Income Flow (Assuming Fixed Int Rate)
Existing SA (SA)
Addl SA = CPRO + TL – TA – SA
CPRO – Capital Required to protect life style
MetLife – HLV Calculator :
HLV based on :
Anticipated age of retirement
Monthly Expenses (Self)
Investment Return Rate
Current Life Insurance
The human life value estimated through either of the above process LESS the current in-force sum insured gives the additional insurance amount that has to be taken by the person to provide for his/her future needs and for his/her family in case of his/her unfortunate demise.