Human Life Value

Human life value is a method of measuring the economic loss a household would suffer from an income earner's death, by projecting that person's future earnings, subtracting what they would have consumed on themselves, and discounting the remainder to present value. It treats a working life the way finance treats any other income-producing asset. The idea and the name are associated with the American insurance economist Solomon S. Huebner: the Wharton School's own institutional history records that in 1924 "Professor Solomon Huebner advances the field of insurance education, emphasizing the economic and social value of human life in his influential work on life insurance." He set the argument out at book length in The Economics of Life Insurance.

What the approach is actually measuring. Most ways of sizing life insurance start from what the survivors will need to pay for. Human life value starts from the other end: what the household loses. If a person earns for another twenty-odd years, the household's exposure is not a list of bills but a stream of income that stops. Valuing that stream is a present-value exercise, and the method's claim is that this is the more complete way to see the loss, because it captures everything the income would have paid for, including the things nobody thought to list.

The mechanic, and the honest part about it. Three steps: project the income the household would lose over the earner's remaining working years, subtract what that earner would have spent on themselves, and discount the result to present value.

The subtraction is what distinguishes the method from a simple multiple of salary. A household of three that loses one earner does not lose the whole paycheck's worth of standard of living, because that earner was also consuming part of it. The relevant loss is the part the earner would not have spent on their own living costs and on the taxes attached to their income.

Formulations differ on exactly which further deductions belong in the calculation, and that variation is not a footnote. It is the same problem as the discount rate, in a different place: a defensible method can be applied by two careful people and produce two very different numbers. The right response is to state the assumptions rather than to present the output as a measurement.

Why the answer is so sensitive. Three inputs drive it, and none of them is a fact.

• The discount rate. A higher rate values the distant years at less, and the effect compounds across a long horizon. The worked example below shows what two ordinary choices do to the same income.
• Assumed income growth. Raises are speculative but not implausible, and building them in raises the answer.
• The working horizon. How long the person would have earned. A planned retirement age is a choice, not a projection.

This is the criticism the approach genuinely deserves and our own coverage of the needs approach already records: the method depends on assumptions sensitive enough that different reasonable choices produce very different figures.

Human life value and the needs approach. These are the industry's own pair, and they are siblings rather than parent and child. The needs approach builds a coverage figure from identifiable obligations: debts, a mortgage balance, education costs, a stated number of years of income replacement, with the DIME checklist as its most common expression. Human life value derives a figure from the earnings stream itself. The needs approach is concrete and can miss something; human life value is comprehensive and depends on assumptions nobody can verify. In practice each is a check on the other, and where they diverge sharply the reason is usually informative: a large gap normally means either that the obligation list is incomplete or that the assumptions behind the discounting are doing more work than they should.

The other place the calculation runs: how much an insurer will issue. People occasionally discover that they cannot buy as much coverage as they want, and the reason is a version of this same reasoning applied from the insurer's side. Two separate limits sit on top of each other.

The legal floor is insurable interest. A policy requires a genuine stake in the insured life, which is what stops insurance being a wager. California's Insurance Code, a clear example of the doctrine, gives an insurable interest based on "a reasonable expectation of pecuniary advantage through the continued life, health, or bodily safety of another person," or on a "substantial interest engendered by love and affection" among close family, and provides that a person has "an unlimited insurable interest in his or her own life, health, and bodily safety."

Notably, nothing in that article caps the size of the policy. The insurable-interest sections set who may insure whom and, for property, how the interest is measured, and they leave the face amount alone. So the second limit, the one people actually meet, is not law at all: it is the insurer's own underwriting guideline about how large a benefit it is willing to issue against a given income at a given age. Those guidelines are the carrier's, not a regulator's, they differ between carriers, and they are not published as a rule anywhere. An applicant who wants their own number has to ask the carrier. What is useful to know is the shape of the question being asked, which is the human life value question: what economic loss would this death actually cause?

The calculation is an ordinary present-value exercise, and running it twice with different assumptions is the fastest way to see its main weakness.

1. Find the income the household would lose. Take gross earnings and subtract what the earner spends on themselves, including the tax attached to that income. What is left is the annual loss.

2. Set the horizon. The number of years the person would have kept earning.

3. Discount it. Multiply the annual loss by the present-value factor for an annuity of that many years at the chosen rate.

A hypothetical example. Priya is 42, earns $130,000 a year, and plans to work to 65, which is 23 years. Of her earnings, roughly $70,000 goes to income tax and to what she spends on herself, so the household's annual loss if she died would be 130,000 − 70,000 = $60,000.

Undiscounted, that is 60,000 × 23 = $1,380,000, which overstates the loss because money arriving in year 23 is not worth its face value today.

Discounted at 3 percent, the present-value factor for 23 years is about 16.44, so the human life value is 60,000 × 16.44 = $986,400.

Discounted at 5 percent, the factor is about 13.49, giving 60,000 × 13.49 = $809,400.

The two answers differ by 986,400 − 809,400 = $177,000, and nothing about Priya changed between them. That gap is the method's central caveat expressed in dollars: the discount rate is chosen, not observed, and it moves the answer by more than most of the line items a needs analysis would argue over. All figures are hypothetical.

Pros

• It measures the whole economic loss rather than a list of remembered obligations, so it will not miss a cost simply because nobody wrote it down.
• It scales naturally with earnings and with age, falling as the remaining working years shorten, which is the shape the real exposure has.
• Subtracting the earner's own consumption is more accurate than treating the entire salary as the loss, and more accurate than a flat multiple of it.
• It gives a defensible second opinion. Running it beside an obligation-based figure and asking why they differ is more informative than either alone.
• It explains a limit people meet in practice, which is why an insurer will not issue an unlimited benefit against a given income.

Cons

• The answer depends on a discount rate, an income-growth assumption and a working horizon, none of which is a fact, and the output moves sharply with all three.
• Formulations disagree about which deductions belong in the calculation, so two correct applications of "the" method can differ.
• It ignores what is already in place. A figure produced this way is a gross exposure, not a coverage recommendation, until existing group coverage, savings and a surviving partner's income are subtracted.
• It values earnings only, so it puts no number on unpaid work, which understates the loss from the death of a non-earning caregiver.
• The precision is misleading. An answer stated to the dollar rests on assumptions stated to the nearest guess.