Chances are you never thought to put a number nonetheless a dollar value on your own life. Is it even possible to put a value on human life? That is exactly what underwriters and insurance companies attempt to do. One of the things that the insurance company needs to determine is whether people are worth the amount of insurance they are applying for. They have to convert the intangible to the tangible. They need to put concrete numbers on a human life. They call it human life value. Ever wonder how they do that?
Human life value is used by life insurance companies to determine the maximum amount of insurance that they can offer you. How do they go about doing this? They base it on the higher of 1. assets or 2. earning potential. Assets is pretty straight forward, they will insure you for 1x your total assets. As for earning potential it gets a little trickier. This will vary slightly from company to company but here is an outline for you:
| Age | Income Multiplier |
| 20-35 | 30x |
| 36-40 | 20x |
| 41-45 | 14x |
| 46-50 | 12x |
| 51-59 | 10x |
| 60-65 | 7x |
| 66+ | 5x |
There is also one more qualifier to see the maximum amount of life insurance a company can offer you, income. Depending on your income levels companies will only allow you to pay a certain amount of your income towards insurance. This may vary from company to company. An idea of what this might look like is that if you make less than $80,000 you are only allowed to contribute up to 5% of your income to life insurance. If you make between $80,000 and $120,000 it goes up to 8%, between $120,000 and $250,000 it’s 10% and over $250,000 is decided on an individual basis.
If you want to maximize your human life value then you would get the most insurance you could. Unfortunately, with income restrictions you might not be able to fund to policy properly so what good is that. If you are looking to maximize the efficiency of your life insurance why not use the maximum funding allowed by the insurance company to properly fund as much life insurance as possible? You can always add more insurance over time or use whole life insurance from a mutual insurance company and you can watch your face value grow.
If you had a BMW would you insure it for the value of a Hyundai? If you had a mansion would you insure it for the value of a motor home? If you were a doctor would insure for the salary of a store clerk? These questions are a lot easier to answer. The reason for that is because no one ever thought to put a value on their own life. Well no one except for the insurance companies. Why not maximize their scale? Don’t sell yourself short.
| Age | Income Multiplier |
| 20-35 | 30x |
| 36-40 | 20x |
| 41-45 | 14x |
| 46-50 | 12x |
| 51-59 | 10x |
| 60-65 | 7x |
| 66+ | 5x |
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{ 6 comments… read them below or add one }
“If you had a BMW would you insure it for the value of a Hyundai?”
That’s a really clever statement to drive the point home. Well said!
.-= Matt SF´s last blog ..Giving a Gift Someone Actually Likes or Wants Doubles the Value =-.
Thank you Matt. I’m always amazed at how people get so caught up in cost that they don’t even realize what value they are getting. The only thing worse than paying for insurance is paying for insurance that is grossly inadequate and doesn’t do anything when you need it to.
Very good discussion EoW. 20-30X my income…. hmmmmmmm… that’s a lot of insurance! Are you saying if someone makes $500,000 in their early 30′s, they should get 5-10million worth of life insurance?
Shouldn’t the ratio be compared to one’s capital rather than income solely?
.-= Financial Samurai´s last blog ..Why The World Forgives Rich And Famous People For Cheating =-.
I might be saying that. The point I’m trying to make is that people devalue their own lives all the time. Why not get as much life insurance as the insurance companies allow? You can’t get as much as you want. Just like you can’t insure your car, house or job for more than they are worth, you also can’t insure your life for more than your human life value. People have no problem maximizing the other types of insurance why not life insurance. Is your life a lesser asset?
You should almost never insure your life for the maximum the insurance companies will allow you to.
Why do you insure your BMW for its full value. First because if you crash it you need to buy another one, because you need a car. Sure you could downgrade to a hyundai but you probably don’t want to do that. Second of all, its clear what a BMW is worth, its worth what it costs to buy a new one.
So why not do that for your life. First, its unclear that the max value that a life insurance company puts on your life is your real value. For instance, if you make 100K and are 40, your life value is apparently 2 million but when you turn 41 it drops to 1.4 million. That’s pretty arbitrary.
Second of all, its not important to insure your life for what its perceived value is, its important to insure your life for the purpose of providing for the needs of those who you leave behind. The BMW example is wrong because you are insuring for replacement of the vehicle which you need to replace. You many not need to replace all or even any of your income. If you are not married and have no kids your life insurance should equal zero. If you are a multi millionare making 2 million a year and worth 10 million but your family regularily lives off of 200K per year your life insurance should equal zero (unless you are using it for estate planning). If you do have a family with more modest income, the biggest factor in determining your life insurance needs is what it takes to provide the life style and options you want provided for them if you are not there. If you make 300K per year but your family lives comfortably on 80K of that per year plus a little extra for savings and college, why on earth would you insure yourself for something like 25x your 300k salary?
Thirdly, if you just blatantly insure yourself for some maximum number that the insurance company says they will insure you for but it provides more money in your death than your family really needs to live the way you want them too, then you are wasting money, paying extra premiums for a benefit that is not needed. You are over-insured because you based your insurance off of the wrong number.
Fourth, if your family has means to provide some of their own needs (perhaps after the kids are gone, etc.) does it make sense for you to try to insure yourself based on your ability to provide income for the next however many years to insure that your spouse never needs to lift a finger again for the rest of their lives? There is value in not attempting to provide a lavish and effort free life from your death until your spouses death. That tends to be a meaningless and wasteful life anyway.
So no, you should not insure for what the life insurance company says is your maximum value. It’s the wrong way to look at the whole thing. And it sounds like a pitch a life insurance salesman would use. I don’t know if you are one, but this type of pitch would get any salesman thrown out of my house.
Apex:
What an enjoyable conversation this is…for anyone that has missed it there are more kind words here: http://www.freemoneyfinance.com/2010/02/free-money-finance-march-money-madness-round-1-posts-6164.html
That being said…
1. You’re right, the valuation of human life is not an exact science. Supply and demand isn’t either. People can and do pay various prices for BMWs even if they are the exact same car. It becomes even harder to value a used car, just look at the difference between kbb, edmunds and that other one I can’t remember the name of right now.
2. To me there is a whole lot more to people’s lives, family and net worth than just numbers. Numbers don’t explain it all and can’t account for the loss of a loved one. I’m a firm believer that people underestimate the financial and emotional loss that occurs when a loved one passes away. You have the right to your opinions as well, but you don’t present any. I could try to make the argument any of your people might want to grow money tax-deferred, access it tax free, shelter money from a law suit or financial aid, diversify their investments, leave as much money to their family as possible and have it be tax free. But maybe not.
3. You bring up a good point here of wasting money. We haven’t even mentioned the value of your dollars being put to life insurance. You definitely need to make sure you get top value for your dollar whether you live or die. I’m a huge proponent of that. Is it a bad thing if your family is left with more money than they really need?
4. I’m not talking about replacing income or whether or not a spouse left behind should or should not have to lift a finger. People will value things different, such as amounts of wealth. Opinions will vary. Mark Cuban expressed his here: http://blogmaverick.com/2009/08/13/the-most-patriotic-thing-you-can-do/
5. I guess it’s a good thing that I don’t want to sell you anything. The freedoms of America allow me to write what I choose and you are free to read and have an opinion on what you choose. Thank you for reading and sharing your thoughts, I’ve thoroughly enjoyed them.
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