The economic value of a human life is the basis for the need for life insurance, and can help determine the amount of life insurance needed by an individual or a family. A human life has an economic value only if some person(s) or organization depends upon it or expects to receive some monetary benefit through that life. The following discussion explains how human life value is determined, and enumerates the specific needs for life insurance.
The Concept of Human Life Value
A human life possesses many values, most of them irreplaceable and not easily measured. These values are founded on religious, moral, and social relationships. From a religious standpoint, for example, human life is regarded as immortal and endowed with a value beyond the comprehension of mortal man. In a person’s relationship with other human beings, a set of emotional and sentimental attachments is created that cannot be measured in monetary terms or replaced by material things.
Such values, however, are not the foundation of life insurance. Although not oblivious to these values—in fact, the life insurance transaction has strong moral and social overtones—life insurance is concerned with the human life value, or the economic value of a human life, which is derived from its earning capacity and the financial dependence of other lives on that earning capacity.
The Economic Value of a Human Life
In terms of its physical composition, the human body has a limited dollar value. In terms of earning capacity, however, it may be worth millions of dollars. Yet, earning power alone does not create an economic value that can logically serve as the basis of life insurance. A human life has an economic value only if some other person or organization can expect to derive an economic advantage through its existence.
If an individual is without dependents and no other person or organization stands to profit through his or her living, either now or in the future, then that life, for all practical purposes, has no monetary value that needs to be perpetuated. Such an individual is rare. Most income producers either have dependents or can expect to acquire them in the normal course of events. Even those income earners with no family dependents often provide financial support to charitable organizations. In either case, a basis exists for life insurance.
Preservation of a Family’s Economic Security
In many cases, an income producer’s family is completely dependent on his or her personal earnings for subsistence and the amenities of life. In many cases, the “potential” estate, or the earnings and savings that may be received and accumulated in the future, is far more substantial than the existing estate—the savings that the family has been to date able to accumulate. The family’s economic security lies in the earning capacity of each income earner, which is represented by his or her “character and health, training and experience, personality and power of industry, judgment and power of initiative, and driving force to put across in tangible form the economic images of his mind,” said Solomon S. Huebner in 1950.
Over time, this economic potential are gradually converted into income, a portion devoted to self-maintenance, a portion to support of dependents, and if the income is large enough, a portion to savings to meet future needs and contingencies. If the individual lives and stays in good health, the total income potential will eventually be realized, for the benefit of the family and others who receive benefits from his or her efforts. If an income earner dies or becomes permanently and totally disabled, the unrealized portion of his or her total earnings potential will be lost, and in the absence of other measures, the family will soon find itself destitute or reduced to a lower income than it previously enjoyed.
This need not happen, however, since there are life insurance contracts that can create a fund at death to at least partially, and possibly fully, offset the lost income of the insured. By means of life insurance, an individual can ensure that the family will receive the monetary value of those income-producing qualities that lie within his or her physical being, regardless of when death occurs. By capitalizing this life value (creating a fund large enough to generate investment income approximating the salary or wages of the individual), an income earner can leave the family in more or less the same economic position they would have enjoyed had he or she lived.
The Moral Obligation to Provide Protection
Most people assume major responsibility for the support and maintenance of their dependent children during their lifetime. In fact, they consider it one of the rewarding experiences of life. In any case, the law attaches a legal obligation to the support of a spouse and children. Thus if there is a divorce or a legal separation, the court will normally decree support payments for dependent children and possibly alimony for the dependent spouse. In some cases such payments, including alimony, are to continue beyond the provider’s death if the children are still dependent or if the alimony recipient has not remarried. In such cases, the parent and ex-spouse are required to provide life insurance or to set funds aside in trust.
It takes a high order of responsibility for a parent to voluntarily provide for continuation of income to dependents after his or her own death. It virtually always involves a reduction in the individual’s own standard of living. Yet, few would deny that a person with a dependent spouse, children, or parents has a moral obligation to provide them with the protection afforded by life insurance, as far as his or her financial means permit.
In his book, Life Insurance, Dr. Solomon S. Huebner said the following concerning the obligation to insure:
From the family standpoint, life insurance is a necessary business proposition that may be expected of every person with dependents as a matter of course, just like any other necessary business transaction which ordinary decency requires him to meet. The care of his family is man’s first and most important business. The family should be established and run on a sound business basis. It should be protected against needless bankruptcy. The death or disability of the head of this business should not involve its impairment or dissolution any more than the death of the head of a bank, railroad, or store. Every corporation and firm represents capitalized earning capacity and goodwill. Why then, when men and women are about to organize the business called a family should there not be a capitalization in the form of a life insurance policy of the only real value and goodwill behind that business? Why is it not fully as reasonable to have a life insurance policy accompany a marriage certificate, as it is to have a marine insurance certificate invariably attached to a foreign bill of exchange? The voyage in the first instance is, on the average, much longer, subject to much greater risk, and in case of wreck, the loss is of infinitely greater consequence.
The growth of life insurance implies an increasing development of the sense of responsibility. The idea of providing only for the present must give way to recognition of the fact that a person’s responsibility to his family is not limited to the years of survival. Emphasis should be laid on the “crime of not insuring,” and the finger of scorn should be pointed at any man who, although he has provided well while he was alive, has not seen fit to discount the uncertain future for the benefit of a dependent household. . . . Life insurance is a sure means of changing uncertainty into certainty and is the opposite of gambling. He who does not insure gambles with the greatest of all chances and, if he loses, makes those dearest to him pay the forfeit.
Diminishing Nature of the Human Life Value
The economic value of an income earner tends to diminish with the passage of time. His or her earning level may continue to increase for a certain period or indefinitely, but with each passing year, the remaining period of productivity becomes shorter. Each year of income that is realized means that there is one year less that remains to be earned. Because an individual’s economic value is the unrealized earning capacity represented by his or her abilities and skills, his or her value must diminish as potential income is converted into actual income.
Life Cycle of Life Insurance Needs
There are three broad categories of the insurance life cycle. The first is childhood. During this period, an individual’s needs are met by their parents or other persons responsible for their welfare. If the child dies before becoming an income producer, the investment in nurturing, maintenance, and education is sacrificed. This can be a sizable sum, especially if the child has been educated at private schools. Various studies have shown that the cost of rearing a child to age 18 ranges from 1.5 times to 3.25 times the parents’ average annual income. At today’s prices, the costs are even higher. While most parents regard these expenditures as one of the duties and privileges of parenthood, and shrink from labeling them as an investment to be recovered in the event of the child’s death, such costs do create a substantial insurable value. This value can logically serve as one of the bases for juvenile insurance, or insurance on children.
The second category of insurance is the adult productive years. The surplus earnings are the source of support for an individual’s dependents and a broad measure of the economic loss to the family if the producer(s) should die. A portion of these earnings will go toward insurance premiums, and another portion should be set aside for both spouses’ retirement needs, but the share that is needed for the care and maintenance of the family should be capitalized and preserved for the family through life insurance.
Finally, the individual’s retirement needs. Although the income loss may be partially filled by federal benefits, pension plans and other tax-qualified plans (such as profit sharing, income deferral, and thrift or savings), and individual investments, the most realistic source of funds to cover any income shortage is investment income, life insurance and annuities. This remaining need can be satisfied with group life insurance through employment and/or a personal insurance program. For long-term planning purposes, however, individuals should not rely on group life insurance for any more than the funds that can—and will—be kept in force after an unforeseen job loss. Individuals should check their employer’s plan to find out how much of the group life insurance they can convert to individual insurance after termination of employment.