L—Human Life Value

In determining how much life insurance should be carried for family income purposes, two basic methods are used. Theneeds approachinvolves a determination of the family’s income requirements. Thehuman life value approachinvolves a capitalization of that part of the breadearner’s income devoted to the support of his family.

Calculating an individual’s human life value involves first determining the amount of his income allocated to family support. This is done by deducting income taxes, personal life and health insurance premiums, and the cost of self-maintenance from the breadearner’s annual income from personal efforts. Assume that the result is $10,000 per year.

The next step involves determining the number of working years to retirement. Our example assumes the figure of 5 years. A reasonable discount rate is then applied to arrive at the present value of these anticipated future earnings. For example, 5 percent might be used as representing a conservative after-tax rate of return for the surviving family.