10.1.1 Human Life Value Approach
It is, of course, difficult to place monetary value on a human being's life. However cold and uncaring it may seem, insurers must be able to do it. In order to accomplish this non-emotional task, they use specifically devised mathematical formulations. The net value of a person's future earning potential is used to assess human life value for insurance purposes.
Using the Human Life Value Approach, the value of a human's life is calculated on net future earnings potential and may be determined by discounting a person's future net earnings at a reasonable rate of interest.
In 1924 the late Dr. Solomon S. Heubner developed this concept pointing out that the value of human life can be expressed as a dollar valuation; that is, determining the economic value of a person by discounting estimated future net earnings used for family purposes at a reasonable rate of interest.
For instance if Sean is 30 years old, the calculated time period in which income would be lost would be counted from age 30 to 65 (typical retirement age). This would be the amount of time in which Sean would have earned money if he lived that long (35 years). After taxes and personal living expenses are deducted, it is determined that Sean devotes $30,000 a year to his family. Now assume the current interest rate (a rate comparable to current rates paid on insurance proceeds held by insurers) is 4%. Multiply the present value of one dollar payable annually for the number of years until expected retirement. The result is a reasonably accurate estimate of the individual's economic value to the family.
This approach is controversial because it does not figure in inflation, wage increases, or improved standards of living. The Human Life Value Approach has been largely replaced by the more practical Needs Approach.
