What is a Human-Life Approach?
A human-life approach is a calculation used to determine how much life insurance an individual needs based on their projected future earnings. It aims to replace their income after they pass away.
Human-life approach vs. needs approach
When determining how much life insurance to buy, individuals and families generally choose either a human-life approach or a needs approach.
The human-life approach focuses on the income that the insured individual will likely bring in over the remainder of their life. The death benefit of the life insurance policy is sized according to that amount.
With a needs approach, on the other hand, the remaining family members calculate how much money they’ll likely need to cover their expenses and buy the policy to match that amount.
The human life value calculation can be particularly useful when determining how much life insurance to buy for working family members, specifically breadwinners. The needs approach is often most useful when sizing a policy for a family member who plays a caregiver role, like a stay-at-home parent.
The human life value calculation
The human-life approach is a multi-step process. To calculate the right size of death benefit, you start by estimating the insured’s income for the remainder of their working years. This factors in their anticipated retirement age and potential future raises.
Next, calculate how much of the household budget goes to the insured (e.g., the amount they spend on food and transportation). Then, subtract that number, along with taxes, from the estimated lifetime income you arrived at in the first step. As a general rule of thumb, many families need roughly 70% of the insured’s income to maintain their quality of life.
This will give you a rough human life value calculation. In other words, the number you arrive at is a rough estimate of how much income you would need to replace if the insured died.
You may want to do further work to ensure you’re arriving at the right amount for your specific needs. If your children will be grown in 10 years but you don’t plan to retire for 20 years, your family may need less than the aforementioned 70% of your anticipated income in the second decade.
Generally, some areas to consider when personalizing your human life value calculation are:
Your age now
Your planned retirement age
Your annual salary and bonuses
Your employment benefits, including health insurance
From there, it’s about understanding what your family’s budget would look like without you. If they needed to buy health insurance without your employment benefit but could sell the second car, that should factor into your calculation, for example.