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Life Insurance : Going Beyond after-life Investment

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There are different types of life insurance policies available in the insurance space, so it is important to understand some of the basics before buying one. Read on to know how life insurance works…

What is human life value concept?

The human life value (HLV) concept is a universally adopted approach utilised by underwriters as well as courts to establish the economic value of a human life.


In life insurance parlance, Human Life Value represents the amount that ensures a family’s standard of living does not get affected if the one who earns for the family dies or is unable to continue earning.

Why the need to value human life?

The main contention behind the concept is that in case the member of the family which provides regular income dies an untimely death, the earnings lost must be replaced which will allow the family to continue on living their lives with as little financial difficulty as possible.

The economic value of human life is considered only in relation to the particular person’s dependents (such as a spouse or children) and the lost earnings that must be compensated. The human life value approach is suitable to determine the life insurance needs only for families with income-producing members. Hence, the other name of the method is income replacement value. This method contrasts the needs approach.

Estimating HLV for the purposes of life insurance

The HLV approach is one of the ways used to determine the amount of life insurance coverage you may need.

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Factors considered while calculating human life value

There are a number of factors involved and some of these are the following:

  • Age of the insured person.
  • Gender
  • Occupation
  • Target retirement age
  • Yearly salary
  • Employment benefits
  • Financial and personal information on the spouse and children

How the human life value approach works – step by step

  • Get an estimate of the person’s average yearly earnings by using current income (also take into consideration future increases in salary).
  • Deduct from the estimated amount in step 1 all living expenses, payments for insurance, and taxes to get the amount that is enough to financially support the family. Generally, that amount is about 70 per cent of the pre-death earnings of the insured person. This amount will largely depend on the financial circumstances surrounding a family.
  • Determine the needed replacement period. That period may be up until the children will have completed college education or until retirement of the family’s breadwinner.
  • Take into account the rate of return that will be paid on the interest-bearing account in which the insurance company will leave the death benefit.
  • Calculate future income by multiplying the estimated net salary by the number of years. After the calculation use the rate of return from the previous step to get an estimate of the current value of the family’s earnings for the desired replacement period.

Although the HLV approach is widely used, it is subject to certain limitations. For instance, life is full of unexpected events and changes. These can have significant impact on anyone’s financial situation and it becomes difficult to estimate the future earnings of an individual.

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