Human Life Value (HLV) — How the Estimate Is Worked Out

What HLV tries to measure

Human Life Value (HLV) is a way of estimating a person's economic worth to their family. It asks what the family would lose in money terms if the person died today. The idea is credited to the economist Solomon Huebner, and it is used as one guide when the amount of life cover is being considered.

HLV is an estimate, not a precise figure and not a prescription. It is worked from assumptions, and two people with the same income can arrive at different values.

How the estimate is built

The method takes the income a person is expected to earn over the remaining working years. From it, it deducts income tax and what the person would have spent on their own living, called personal consumption. What is left is the person's contribution to the family.

That stream of future contributions is then discounted to its present value, because a rupee to be received years from now is worth less than a rupee today. The discount rate does this conversion. The higher the rate assumed, the less each future rupee is worth today, so the HLV comes out lower; a lower rate gives a higher HLV.

Three assumptions therefore drive the answer: how income grows, what share goes to personal consumption, and the discount rate. None is prescribed. The share assumed for personal consumption differs from household to household.

The needs-based method

A needs-based calculation is a different method. Instead of starting from income, it adds up the family's liabilities and future needs, such as outstanding loans and children's education, and subtracts existing life cover and assets that can be turned into cash.

The home the family lives in is normally left out of the assets, because the family is expected to keep living in it and not sell it. A home loan still outstanding is counted as a liability. The two methods are often used side by side, and they need not give the same figure.

Financial underwriting

Insurers make their own check on the amount of cover. Financial underwriting tests whether the sum assured asked for is reasonable for the proposer's income and financial position.

Where the sum assured looks out of proportion to declared income, insurers usually ask for documents such as income-tax returns or salary slips, under their own Board-approved underwriting policy, and then accept, modify or decline the proposal. The limits used differ from insurer to insurer.

Rules at a glance

Key points

• HLV estimates the money value of a person's future contribution to the family.
• It deducts income tax and personal consumption from expected income and discounts the balance to present value.
• A higher assumed discount rate gives a lower HLV; a lower rate gives a higher one.
• A needs-based calculation adds liabilities and future needs and subtracts existing cover and assets that can be turned into cash.
• The family home is normally left out of the assets; an outstanding home loan counts as a liability.
• Financial underwriting checks the proposed sum assured against income, under each insurer's own underwriting policy.

Common misunderstandings

• HLV is not an exact figure: it changes with the assumptions for income growth, personal consumption and the discount rate.
• HLV is not the person's total future income: income tax and the person's own living expenses are deducted first.
• A higher discount rate does not raise the HLV: it lowers it, because future income is worth less today.
• HLV and a needs-based calculation are not the same method: one starts from income, the other from liabilities and needs.
• The family home is not counted as an asset in a needs-based calculation merely because it is valuable: the family is expected to keep living in it.

Questions people ask