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Can anyone put a price on human life? Is it possible to quantify the value of human life?
Every human being in this world is valuable and invaluable to him and his family. An attempt to quantify the value of human life may seem ridiculous.
But the main job of an insurer is 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 for a maximum possible limit and it is the job of the insurance company to cut a line for this limit and the most important thing is to protect themselves from underinsured problems, which countries like the United States are now facing.
Concept of value of human life:
Suppose a person buys car insurance for Rs 100,000 / – ($ 2,500) for a car worth Rs 800,000 / – ($ 20,000). The car suffers an accident and is totally damaged. Even if the insurance company honors your claim in its entirety, you will receive only Rs. 100,000 ($ 2,500). With this amount, will you be able to buy the same car you had before the accident? The answer to this question would be ‘No’, because you have not insured your car for its gross value. In simple terms, the car was not insured for what it was worth, but underinsured, which nullified the “Principle of Indemnity”.
Sometimes, underinsurance leaves no trace of insurance when it does not fulfill the purpose for which it was made. In the same way, a Human Life insurance should be sought taking into account the economic damage that the family would suffer in the absence of this person and that must be the amount of the insurance. Rather than buying life insurance policies as a tool to reduce tax liability, provision for old age, to enter small-scale stock markets, etc., it would make sense to seek insurance from the angle 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. The HLV concept is used by various professionals such as underwriters, courts, etc. to determine the economic value of a human life. For the victims of the ‘terrorist attack of September 11, 2001’ in the twin towers, the courts decided the settlement amount based on this concept.
Insurance companies use what is known as the concept of HUMAN LIFE VALUE to calculate the economic value 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 will be its economic value to the family. On the contrary, the economic loss of the family due to the death of the person is his value to his family. This would be the maximum amount for which a person can apply for insurance protection.
Basically, the value of human life is based on the earning capacity of the individual. It is the amount that the family will lose in your absence. Applying what is called the concept of Human Life value, the amount of financial support that the person gives to his family is determined.
Calculating the value of human life requires a detailed analysis of many factors. Some of them are –
1. Annual income for life
2. Balance of the active income period until retirement
3. Personal expenses
4. Inflation
5. Future salary increase, etc.
The first step towards calculating the 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 such as premium for insurance policies, living expenses, income tax, etc. This amount will be the amount you give to your family annually. The economic value of this life depends again on the length of your active income period. Suppose the person is 25 years old and his annual income, after deducting all his personal and other expenses, is 200,000 rupees (about $ 5,000). Assuming you would continue your existing job until your retirement until age 55, then your family’s income will continue for 30 years as long as you survive until retirement. So if he survives until his retirement, the family will receive 200,000 rupees for 30 years, that is. 200,000 * 30 = 6,000,000 ($ 150,000). This will be the amount that the family will lose due to their untimely death.
The value thus arrived at would be the logical amount for which a person needs to be insured, in case he wants his family to maintain the same state of life in his absence. But this again depends on your ability to pay, that is, on your ability to pay the insurance policy premium in the amount of Rs. 6,000,000 ($ 150,000), taking into account current family circumstances and requirements.
HLV calculation methods
Method – I: Income replacement value
This is one of the basic insurance calculation methods and is based on current annual income.
Insurance needs = annual income * number of years left to retirement.
If the annual income is 100,000 rupees ($ 2,500) and the age is, say, 35 years. Assuming the retirement age is 60, the balance of years of service is 25 years.
Insurance value = 100,000 * 25 = 25,00,000 lakes ($ 62,500).
Method II: fixed multiplier
Another method of calculating insurance is to apply a fixed multiplier to 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 100,000 * 18 = 1,800,000 lakes ($ 45,000). If the age is 52 with an annual income of 4 lakes ($ 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 you make and would have made to your family in the event of sudden death.
Therefore, HLV is 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 look at this example for a better understanding.
Age of ‘X’: 40 years
Retirement age: 60 years
Current salary: 300,000 per year (expected to remain the same)
Personal expenses: 125,000
Net contribution to the family: 175,000 (300,000 – 125,000)
Suppose ‘X’ dies at the age of 40.
Family lost income: 175,000 * 20 years (60 – 40) * discount rate for 20 years
(Present value factor): 1900000
HLV calculation methods adopted by some leading insurers:
Prudential life ICICI:
HLV based on:
age
Retirement age
Financial assets (TA)
Liabilities (TL)
Inflation
% increase in revenue stream (assuming a fixed internal rate)
Existing SA (SA)
Additional 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
Supplemental benefits
Group / tax rate
Monthly expenses (own)
Investment return rate
Current life insurance
The value of human life estimated through any of the above processes LESS than the current insured amount in force gives the amount of additional insurance that the person must take to cover their future needs and for their family in the event of / their unfortunate disappearance.
