How to calculate the human life value?

It is hard, if not impossible, to measure the value of a human life. Yet, when it comes to life insurance, this is necessary for individual life insurance needs to be determined. The economic value of a life to those who depend on that person, is calculated on the basis of the breadwinner's current income and potential earning power.

The backbone of the human life value approach is the idea that if an income-producing family member should die prematurely, their lost earnings must be indemnified for. Hence the other name of this method - income replacement value.

Estimating Human Life Value - Step by Step

1. Estimate the individual's average annual earnings on the basis of present income, while considering potential future salary increases.
2. Deduct from earnings all taxes, living expenses, various insurance premiums if applicable, to arrive at the amount necessary to support the family. Usually, the amount that the surviving family members will need to carry on after the insured's death is 70 per cent of the insured's pre-death earnings. This share can vary, depending on each family's particular case.
3. Determine the replacement period. This can be until the insured's dependents grow up and finish college, or until the breadwinner's retirement age.
4. Discount the future earnings by selecting a rate of return. One should use the rate of return paid on the interest-bearing account that the life insurance company has left the death benefit in.
5. Determine future income by multiplying the necessary net salary by the number of years. Then apply the selected rate of return to estimate the present value of the family's earnings for the replacement period.

Although the human life value approach is relatively accurate, it has certain limitations. First of all, as life can bring about unexpected changes, it is difficult to determine future individual earnings.

Furthermore, external factors, such as inflation and the existence of benefits, are ignored.

And finally, as the human life value estimate does not take into account needs other than the insured's income, the amount of life insurance it indicates goes far below the actual needs of a family.

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