Human Life Value indicates a person’s earning potential. How much is a human life worth? Let us tell you everything you need to know about this method of calculating your insurance needs.
What is the Human Life Value approach?
The Human Life Value approach is a way to calculate the Life Insurance needs of an individual. This method considers the level of financial loss a family will suffer in the event of the demise of the insured person.
What factors are considered in the Human Life Value approach?
A Human Life Value is calculated by considering various factors such as an insured person’s age, gender, retirement age, occupation and annual income. This method also considers the financial status of the insured person’s spouse and dependent children.
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The Human Life Value method of calculating Life Insurance needs is primarily used for families looking for insurance cover.
The main aim of the Human Life Value calculation is to find out how much money is required to replace the loss of income for the family in case of the demise of the insured person.
You must remember to factor in only the post-tax income and adjust any expenses incurred during the insured’s earning period.
Calculating Human Life Value to determine insurance needs
To calculate Human Life Value you will need to give an estimate of the expected future earnings of the insured person. Compare this against the present income at the disposal of the family.
Additional Reading: Advantages of Life Insurance
Here is a step-wise guide to help you.
- Step 1: An insured person’s earnings will need to be estimated for a specific time period. For how many years is the income replacement required? Remember to consider the insured person’s average annual income as well as future income appreciation that is expected. The growth of earnings is an important factor when figuring out your Life Insurance requirements.
- Step 2: Deduct from the insured person’s income, an estimation of the annual taxes payable and living cost that will be incurred. What is the actual amount of money required to cover the family’s needs? This is generally a certain percentage of an insured person’s income.
- Step 3: Calculate how long the replacement income will be required. How old are the insured person’s dependents? The period of time during which a replacement income is needed would be until the time the dependents are old enough to financially support themselves.
- Step 4: To calculate future earnings, do the math. Net salary required for x time period.
Now calculate the current value of any future earnings by using an assumed rate of return. You may need to use a financial calculator for this.
The Human Life Value calculation only offers replacement income
Calculating Human Life Value only gives you a sum that will be required as a replacement of the income of the insured person.
The Human Life Value calculation does not consider a lump sum monetary payout on the demise of the insured person.
Remember that Human Life Value only gives you a cursory estimate of a person’s insurance needs. It does not factor in every financial aspect of a person’s life and these differ from individual to individual.
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Additional Reading: How to Judge A Life Insurance Agent