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 himself and his family. An attempt to quantify the value of human life may sound ridiculous.
But it becomes an underwriter’s primary job to evaluate a human life in terms of money, to restrict the amount of insurance that can be provided to a person. Every person on this earth would like to be insured for a maximum possible limit and it is the job of the insurance company to cut a line for this limit and most importantly to protect themselves from underinsured problems, which are countries like the United States. facing now.
Concept of Value of Human Life:
Suppose a person buys car insurance of Rs.100000/- ($2500) for a car worth Rs.800000/- ($20000). The car suffers an accident and is totally damaged. Even if the insurance company accepts your claim in full, you will only get Rs.100000 ($2500). 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 rather underinsured, thus nullifying the “Indemnity Principle”.
Underinsurance sometimes leaves no trace of insurance when it does not serve the purpose for which it was made. In the same way, Human Life insurance must be sought taking into account the economic loss that the family would suffer in the absence of this person and that must be the amount of the insurance. Instead of buying Life insurance policies as a tool to reduce tax liability, old age provision, to dabble in the stock markets on a small scale, etc., it would make sense if the insurance was looked at from a replacement angle. economics of the value of human life.
The concept of human life value 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 insurers, courts, etc to determine the economic value of a Human Life. For the victims of the ‘terrorist attack of September 11, 2001’ on the twin towers, the courts decided the settlement amount based on this concept.
Insurance Companies use what is known as the HUMAN LIFE VALUE concept to compute 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 one person will be its financial value to the family. Rather, the family’s financial loss upon the person’s death is their value to their 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 known as the Human Life value concept, the amount of financial support that the person provides to his or her family is determined.
Calculating the value of human life requires a detailed analysis of many factors. Some of them are –
1. Annual income of 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 value of human life would be to determine the person’s net annual income after deducting the amount spent by him for his personal use, such as insurance policy premiums, living expenses, income tax, etc This amount will be the amount you provide to your family annually. The economic value of this life again depends on the length of your period of active income. Suppose the person is 25 years old and his annual income after deducting all his personal and other expenses is Rs 200,000 (about $5,000). Assuming he would continue his existing job until his retirement to age 55, then his family’s income would continue for 30 years, provided he survives until retirement. So if he survives till his retirement then the family would receive Rs.200,000 for 30 years ie. 200,000 * 30 = 6,000,000 ($150,000). This will be the amount the family will lose from your untimely death.
The value thus arrived at would be the logical amount for which a person needs to be insured if they want their family to maintain the same state of life in their absence. But this again depends on his ability to pay i.e. his ability to pay the premium of the insurance policy in the amount of Rs.6,000,000 ($150,000), taking into account the requirements and circumstances of his family. current.
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 until retirement.
If the annual income is Rs.100000 ($2500) and the age is 35 years. Assuming the retirement age is 60, the years of service balance is 25 years.
Insurance value = 100000 * 25 = 25,00,000 lacs ($62500).
Method II: Fixed multiplier
Another insurance calculation method is by applying a fixed multiplier on annual income. Multiply by the person’s age.
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 lacs ($45,000). If the age is say 52 years with an annual income of 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 the contribution you make and would have made to your family in the event of a sudden death.
So HLV is defined as the present value of all future revenue. It also includes other fringe benefits, less out-of-pocket expenses, life insurance premium, and taxes.
Let’s see this example for 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.
Income lost by the family: 175000 * 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 (AT)
Liabilities (TL)
Inflation
% increase in income stream (assuming a fixed interest rate)
Existing SA (SA)
Addl 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
Supplementary Benefits
Tax bracket/rate
Monthly Expenses (Own)
Investment rate of return
current life insurance
The value of human life estimated through any of the above processes MINUS the current sum insured gives the amount of additional insurance that the person must take out to meet his/her future needs and for his/her family in the event of his/her unfortunate death.
