The Human Life Value Approach calculates life insurance needs based on estimating the future earnings of the insured that would need to be replaced for the family. It involves multiple steps including estimating future earnings and salary increases, subtracting taxes and living expenses to determine the net salary needed, determining how long earnings need to be replaced, selecting a discount rate, and using that rate to calculate the present value of future net earnings. An example calculates a present value of $683,556 for replacing $48,500 in annual net income until retirement at age 65, assuming a 5% discount rate. This method focuses only on replacing lost income and does not account for other financial needs.

1. 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

2. 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

3. spreadsheet, specialized software, a financial function
calculator, or by using discount interest tables.
Example
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.