Human Life Value (HLV) Explained

Understanding your Human Life Value (HLV) is a crucial step in comprehensive financial planning. It helps you quantify the economic contribution you are expected to make to your family over your working life. This page provides a detailed explanation of HLV, its calculation, and its significance.

What is Human Life Value (HLV)?

Human Life Value (HLV) is the present value of all your future income, minus your personal expenses, that would be available to your dependents. In simpler terms, it's the financial worth of your life to your family, representing the amount of money they would need to maintain their lifestyle if you were no longer able to provide for them.

How is HLV Calculated?

The calculation of HLV involves several key factors, aiming to estimate the net financial contribution you would make over your remaining working years. It typically considers:

• Annual Income: Your current gross annual income.
• Personal Expenses: The portion of your income you spend on yourself (e.g., food, clothing, personal entertainment), which would not be needed by your family if you were gone.
• Remaining Working Years: The number of years you expect to continue earning income until retirement.
• Discount Rate (Inflation/Interest): An assumed rate to bring future earnings to their present value, accounting for inflation and potential investment returns.

Why is HLV Important?

HLV is a critical concept for several reasons, primarily in the context of life insurance and financial planning:

• Determining Adequate Life Insurance: HLV provides a scientific basis for calculating the optimal amount of life insurance coverage needed to protect your family's financial future. It ensures that your dependents receive enough to cover their living expenses, education, and other financial goals.
• Financial Planning: It helps individuals understand their economic worth and plan for potential financial gaps in case of unforeseen circumstances.
• Estate Planning: HLV can be a component in broader estate planning, ensuring that your legacy aligns with your financial goals for your family.

Step-by-Step HLV Example

Let's walk through a simplified example to illustrate how HLV might be calculated:

1. Determine Annual Income: Assume an individual earns $75,000 per year.
2. Estimate Personal Expenses: They spend $25,000 annually on personal expenses.
3. Calculate Net Income for Dependents: $75,000 (Income) - $25,000 (Personal Expenses) = $50,000. This is the amount available to dependents.
4. Estimate Remaining Working Years: The individual is 35 years old and plans to retire at 65, so 30 remaining working years.
5. Apply a Discount Rate: Using a simplified discount rate of 5% to account for inflation and time value of money.
6. Calculate Present Value: The present value of $50,000 per year for 30 years at a 5% discount rate would be approximately $768,675. This is their estimated Human Life Value.

This example is simplified; actual HLV calculations can be more complex, factoring in salary growth, inflation adjustments, and more precise discount rates. However, the core principle remains the same: to quantify the financial impact of an individual's life on their dependents.