What is the human life value approach to life insurance?

Information courtesy of USAA Life Insurance Company and USAA Life Insurance Company of New York

Taken out of context, the phrase "human life value," or HLV, may sound a little inhumane. After all, how can you put a value on human life? Most people would argue that you can't.

But in the life insurance industry, HLV is just one way of calculating how much life insurance you may want to consider. It asks, if you were to die, how much money would it take to replace the economic value you bring your family throughout your working years?

Read on for more information on when HLV is useful and how it's calculated.

How to find the correct amount of life insurance

Because life insurance provides protection for your loved ones, it's important to get the right amount. You don't want to have too much or too little. And if you take time to run the numbers, you're less likely to have to reapply for life insurance later.

There are two common methods used to calculate how much life insurance you should consider.

Needs-based approach

To determine your life insurance needs, USAA relies on the needs-based approach.

A needs-based approach says that people buy life insurance to provide for their surviving family members' immediate and ongoing costs. These expenses might include debt obligations, income replacement, final expenses and education costs.

The needs-based method compares funds that will be needed after a death to existing resources, such as assets or other life insurance. The goal is to bridge that gap to find the true need.

For financial planning purposes, the needs-based method is helpful because it takes a holistic approach and considers things like interest rates and inflation. It also allows room for compromise, as few people have an unlimited budget to dedicate for the cost of life insurance.

Human Life Value approach

While we're in the "needs-based" camp at USAA, there are times when the HLV method can be useful.

For example, HLV is helpful in determining the maximum amount of insurance you should have. It's typically used in scenarios where there is an established family and dedicated income earners. For example, you have a dual income household with dependent children.

In theory, the HLV method could also be useful if you're just starting out and want insurance, but you don't have the financial obligations yet that warrant a high amount of coverage. HLV encourages you to get as much life insurance as you can, which isn't necessarily a bad thing.

What's included in the human life value calculation?

The HLV method considers factors like income, retirement age, taxes, expenses, and inflation rate.

• Income: HLV uses your current income to predict your future earning potential. Because a job change can impact your HLV calculation, review your life insurance annually to be sure it reflects your current needs.
• Retirement age: This is used to calculate the amount of time you'd need to replace income prior to retirement. HLV focuses on replacement of earned income from now through retirement.
• Taxes and expenses: Consider your portion of taxes and monthly expenses which would no longer apply in the event of death.
• Inflation: Given your income provides purchasing power for your living expenses, it's important to understand the potential impacts of inflation relative to expected pay increases.

How to calculate human life value

Although HLV can be calculated by yourself, it involves a heavy dose of future and present value calculations best accomplished with a financial calculator. It may be beneficial to have a professional walk you through the calculation and explain how the details apply to your individual circumstances.

For a quick snapshot, you can also use an online human life value calculator.^{See note1}

Get started today.

Ultimately, getting life insurance now is more important than waiting. Don't let a seemingly confusing calculation stop you from thinking about how life insurance can help you and your family, or from taking action for your financial security.