What is 'Human-Life Approach'

The human-life approach is a method of calculating the amount of life insurance a family will need that is based on the financial loss the family would incur if the insured person were to pass away today. It is usually calculated by taking into account a number of factors, including, but not limited to, the insured individual's age, gender, planned retirement age, occupation, annual wage, employment benefits, as well as the personal and financial information of the spouse and/or dependent children.

Since the value of a human life has economic value only in its relation to other lives, such as a spouse or dependent children, this method is typically only used for families with working family members. The human-life approach contrasts the needs approach.

BREAKING DOWN 'Human-Life Approach'

When using the human-life approach, it's necessary to replace all of the income that's lost when an employed spouse dies. This figure includes after-tax pay and makes adjustments for expenses (like a second car) incurred while earning that income. It also considers the value of health insurance or other employee benefits.

The Human-Life Approach Calculation

Step One: Estimate the insured’s remaining lifetime earnings, taking into consideration both the “average” annual salary and potential future increases, which will have a significant impact on life insurance requirements.

Step Two: Subtract a reasonable estimate of annual income taxes and living expenses spent on the insured. This provides the actual salary needed to provide for family needs, minus the presence of the insured. As a rule of thumb, this figure should be close to about 70 percent of the pre-death income, although this number may from family to family, depending on individual budgets.

Step Three: Determine the length of time for which earnings will need to be replaced. This time period could be until the insured’s dependents are fully grown, and no longer require financial support, or until the insured's assumed retirement age.

Step Four: Select a discount rate for future earnings. A conservative figure for this estimate would be the assumed rate of return on U.S. Treasury bills or notes. This is needed because a life insurance company will leave a death benefit in an interest bearing account.

Step Five: Multiply the net salary needed by the length of time needed to determine the future earnings. Then, using the assumed rate of return, figure out the present value of the future earnings.

Human-Life Approach Calculation Example

Consider a 40-year-old that makes $65,000 per year. After following the above steps, it is determined that the family needs $48,500 per year to support itself...and must do so until retirement age (25 years away). Assuming a 5 percent discount rate, the present value of this 40-year-old's future net salary over 25 years would be $683,556.

  1. Life Insurance

    Life insurance is a contract in which the insurer guarantees ...
  2. Key Person Insurance

    Key person insurance is a life insurance policy that a company ...
  3. Insurance Coverage

    Insurance coverage is the amount of risk or liability covered ...
  4. Term Life Insurance

    A policy with a set duration limit on the coverage period instead ...
  5. Insurance

    Insurance is a contract (policy) in which an insurer indemnifies ...
  6. Decreasing Term Insurance

    Decreasing term insurance is a renewable term life insurance ...
Related Articles
  1. Insurance

    Tips for Helping Clients with Life Insurance Needs

    Life insurance needs will likely change over the client’s lifetime and again financial advisers can provide an objective sounding board.
  2. Insurance

    Life Insurance Should Cover Emotional Needs Too

    Life insurance should cover the financial and emotional needs of family members.
  3. Financial Advisor

    Is Life Insurance From Your Employer Enough?

    Covering the needs of the ones you would leave behind is not easy. But efforts to secure a life insurance policy outside of work should pay off.
  4. Financial Advisor

    Buying a Life Insurance Policy? Read This First

    Knowing who needs life insurance, how it works and the different types of insurance can help consumers make informed decisions about this product.
  5. Personal Finance

    Life Insurance: Choosing Enough Coverage Is Key

    Having enough life insurance should be a part of a sound financial plan.
  6. Insurance

    How to Pick the Right Life Insurance Plan

    Finding the right life insurance policy - if you need one at all - can be more challenging than it seems. Use this guide to find the right one for you.
  7. Insurance

    How to Calculate How Much Life Insurance You Need

    Use this method to determine how much life insurance you need.
  8. Retirement

    Life Insurance After Retirement: Do You Need It?

    The answer depends on your sources of income, how much debt you carry and whether you have dependents who rely on you financially.
  9. Insurance

    Deciding If Term Life Insurance Is Right for You

    If you decide you need life insurance, term life insurance can be an affordable way to provide for your dependents.
  1. What is the difference between term and universal life insurance?

    Term life insurance is the most basic of insurance policies. Universal life insurance falls under a broader category of policies ... Read Answer >>
Hot Definitions
  1. Treasury Yield

    Treasury yield is the return on investment, expressed as a percentage, on the U.S. government's debt obligations.
  2. Return on Assets - ROA

    Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets.
  3. Fibonacci Retracement

    A term used in technical analysis that refers to areas of support (price stops going lower) or resistance (price stops going ...
  4. Ethereum

    Ethereum is a decentralized software platform that enables SmartContracts and Distributed Applications (ĐApps) to be built ...
  5. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  6. Financial Industry Regulatory Authority - FINRA

    A regulatory body created after the merger of the National Association of Securities Dealers and the New York Stock Exchange's ...
Trading Center