Human Life Value Approach

The Human Life Value Approach to Calculating Life Insurance Needs:

The human life value concept deals with human capital, which is a person’s income potential. It goes beyond just the numbers and considers the overall impact of losing someone, especially the breadwinner.

Calculating one’s life insurance needs with this process involves multiple steps. The Future expected earnings of the insured needs to be capitalized and the present value of the income flow to the family, for the time frame needed, to be determined.

How to Calculate:

Step One  

  • Estimate the insured’s earning for a period of time, which replacement would be needed.
  • Take into consideration both the “average” annual salary and any future salary increases of the insured.
  • Including “growth” of earnings will have a significant impact on your life insurance needs.

Step Two 

  • Subtract from earnings a reasonable estimate of annual taxes and living expenses spent on the insured, in order to arrive at the actual salary needed to provide for family needs. Commonly, this is a percentage of salary.
  • It is often suggested that the survivor will need about 70% of the pre-death income to carry on after the insured’s death. This percentage will vary from family to family, depending on their individual budgets.

Step Three 

  • Determine the length of time the net earnings need to be replaced. This could be until the insured’s dependents are fully-grown and no longer need financial support, or until the assumed retirement age of the insured.

Step Four 

  • Select a rate in which to discount the future earning. A conservative estimate on the rate of return would be the return on the U.S. Treasury bills or notes, of the rate of return paid for death precedes left on deposit with the insurance company.
  • A life insurance company will leave a death benefit in an interest bearing account, and a safe assumption would be the rate on a money market or certificate of deposit (CD) account.

Step Five 

  • Multiple the net salary needed by the length of time needed to determine the future earnings.
  • Then calculate the present value of the future earning using the assumed rate of return, which can be performed using a spreadsheet, specialized software, a financial function calculator, or by using discount interest tables.


Let’s assume you are 40 years old and make $65,000 per year. After examining your family budget, it is determined that $48,500 per year is needed to support your family. It is also determined that this income would need to be replaced until retirement at the age of 65 (25 years). If we assume a 5% discount rate, the present value of your future net salary would be $683,556.

This method is ideal in situations where replacing the income lost, due to the death of a breadwinner, is the primary concern. However, this method only factors in the replacement of the income and does not take into account any lump-sum needs at death.

In addition, a client’s financial situation might be more complex and may even require additional analysis. For example, the issues of funding a college education, integrations with Social Security benefits, paying estate tax, and determining other sources of income are not included in this method.

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