Give this idea a thought. The Human Life Value (HLV) of an individual is a financial asset, like any other financial asset. It is not a tangible asset like a life insurance policy or a fixed deposit. There is no document that proves its existence. There is no document that indicates the HLV of an individual. But at the same time it is a financial asset created the day a person starts earning money in his or her career.

We will look at this idea in two articles: In Part 1, (this article) we shall understand the concept of HLV. In Part 2, (the next article) we shall see how the concept of HLV as a financial asset is crucial for selling to HNIs.

What is HLV?

First let me explain HLV. Solomon Huebner developed the concept of HLV. The concept of HLV says that the value of a human life is the discounted value of the person’s future earnings minus the discounted value of the expenses a person incurs on self, including the income tax paid. In simple terms HLV is the financial value or benefit, that a family gets during the working life of an earning member from the family.

An Example of HLV

The idea in its concept is quite simple. Suppose a person, at the start of his or her working career is earning a salary of Rs. 500,000 p.a., and the person expects that the income will rise steadily for the next 40 working years @ 8 % p.a., the person’s income during the future 40 years is shown in the Table below.

End of Year	Salary	Taxes and Self Expenses @ 40 % of Salary	Value of income for family	Discounted Value of Value to Family
1	5,00,000	2,00,000	3,00,000	2,83,019
2	5,40,000	2,16,000	3,24,000	2,88,359
3	5,83,200	2,33,280	3,49,920	2,93,800
4	6,29,856	2,51,942	3,77,914	2,99,343
5	6,80,244	2,72,098	4,08,147	3,04,991
6	7,34,664	2,93,866	4,40,798	3,10,745
7	7,93,437	3,17,375	4,76,062	3,16,609
8	8,56,912	3,42,765	5,14,147	3,22,582
9	9,25,465	3,70,186	5,55,279	3,28,669
10	9,99,502	3,99,801	5,99,701	3,34,870
11	10,79,462	4,31,785	6,47,677	3,41,188
12	11,65,819	4,66,328	6,99,492	3,47,626
13	12,59,085	5,03,634	7,55,451	3,54,185
14	13,59,812	5,43,925	8,15,887	3,60,868
15	14,68,597	5,87,439	8,81,158	3,67,676
16	15,86,085	6,34,434	9,51,651	3,74,614
17	17,12,971	6,85,189	10,27,783	3,81,682
18	18,50,009	7,40,004	11,10,005	3,88,884
19	19,98,010	7,99,204	11,98,806	3,96,221
20	21,57,851	8,63,140	12,94,710	4,03,697
21	23,30,479	9,32,191	13,98,287	4,11,314
22	25,16,917	10,06,767	15,10,150	4,19,074
23	27,18,270	10,87,308	16,30,962	4,26,981
24	29,35,732	11,74,293	17,61,439	4,35,038
25	31,70,590	12,68,236	19,02,354	4,43,246
26	34,24,238	13,69,695	20,54,543	4,51,609
27	36,98,177	14,79,271	22,18,906	4,60,130
28	39,94,031	15,97,612	23,96,418	4,68,812
29	43,13,553	17,25,421	25,88,132	4,77,657
30	46,58,637	18,63,455	27,95,182	4,86,670
31	50,31,328	20,12,531	30,18,797	4,95,852
32	54,33,835	21,73,534	32,60,301	5,05,208
33	58,68,541	23,47,417	35,21,125	5,14,740
34	63,38,025	25,35,210	38,02,815	5,24,452
35	68,45,067	27,38,027	41,07,040	5,34,347
36	73,92,672	29,57,069	44,35,603	5,44,429
37	79,84,086	31,93,634	47,90,452	5,54,702
38	86,22,813	34,49,125	51,73,688	5,65,168
39	93,12,638	37,25,055	55,87,583	5,75,831
40	1,00,57,649	40,23,060	60,34,589	5,86,696
Total	12,95,28,259	5,18,11,304	7,77,16,956	1,66,81,583

The Table Explained

Column 1 indicates the year of service, column 2 shows the annual salary, with each year growing at 8 % more than the previous year, column 3 shows the amount spent on income tax and self expenses (calculated at 40 % of annual salary), column 4 shows the amount available for family (the balance of 60 %), and column 5 gives the discounted or present value of the amount available to the family each year.

The discounted values are totaled to get the present value of all earnings of the 40-year period. The present value is Rs. 1,66,81,583. The discounted or present value indicates the value in today’s money value, of all earnings of the individual over a period of 40 years.

HLV explained

The concept of HLV says that these nominal values should be discounted to the present values to know the HLV in today’s value. This is done to know the insurable value today. That is to say while the individual may earn Rs. 1,00,57,649 in the 40th year of service, what is the value of the 40th year’s salary in today’s value? The salary of Rs. 1,00,57,649 earned in the 40th year is today worth Rs. 5,86,696 when discounted at 6 %, the rate of interest in a bank or the average inflation rate.

Similarly for the money earned in all other years in the future period is also discounted, as indicated in the 5th column. The total of all discounted values for each year is the discounted present value of all future earnings of the individual. In this case (as given in thre Table above) the total of all discounted values for all 40 years is Rs. 1,66,81,583.

Where is HLV used

The HLV concept is taken as a standard to decide on the insurable value of an individual. If a person is earning Rs. 500,000 p.a. today, and expects that his or her salary steadily rises at the rate of 8 % every year, assuming that the individual spends 40 % of the salary on self-expenses, then as per the HLV concept, the person should have an insurance policy with a sum assured of Rs. 1,66,81,583, which ism the HLV of the person.

But the HLV also gives us another very important data about the individual.

We can look at the figure of Rs. 1,66,81,583 from another angle. HLV is the financial asset of the individual created at the start of his or her career on a job or at the start of earning life. When the individual in our example started work, he or she created a financial asset that his or her labour and efforts will produce over the next 40 years. The mere fact that the person has entered work life and is likely to continue working for the rest of his or her productive life, creates a financial asset. The money is there, but yet to come.

Calculating HLV for different categories of work

In practice there are many variations in the way one earns income. Only in a part of the organised sector (such as government and private employment in large companies), the method used in the Table above will apply. But for a large part of the working population it is not as simple to calculate the future earnings of an individual. Let us take the following examples:

• Employed in small private companies
• Contractual job, not permanent
• An industrialist
• Small shop owners
• A professional such as lawyer, architect
• Real estate agents
• Taxi drivers/owners
• Delivery boys
• A farmer
• In rural work such as artisans, blacksmith, etc.

In all the cases mentioned above future income is highly uncertain. Most of the individuals of the type mentioned above would not be able to calculate their likely earnings 5 years into the future, leave alone 40 years.

HLV as a Financial Asset has Risk attached to it

HLV as a financial asset, has risk attached to it, like all other financial assets. In the case of a government servant, the risk of HLV is low. But in the case of almost all others in the working population the risk of earning the HLV is high, because of volatility of income during the future period.

Just as life insurance endowment or post office are low risk, those in certain areas of employment have a HLV that is low risk. And just as Growth Fund of ULIP and shares are high risk, those in certain other categories of work have a HLV that is high risk. Like all other financial assets, HLV too can be low risk or high risk.

As in all other financial assets, HLV accumulates value over a period of time

Value is accumulated in HLV just as interest is accumulated in fixed deposits or NAV of ULIP. It is similar to creating a 40 year cumulative fixed deposit, where interest is accumulating for 40 years and the principal and interest is paid after 40 years. The fixed deposit is a financial asset.

Similarly, the HLV has been created at the start of the work life. The financial asset will accumulate with the labour of the individual over the next 40 years. As a financial asset it is similar to the bank fixed deposit. In HLV calculations labour replaces interest as the accumulator of wealth.

HLV has a degree of uncertainty

Suppose the individual invests money in a risky financial asset and not a bank deposit, the chances are that the individual may not receive the expected money at the end of 40 years. In a guaranteed return financial product, such as life insurance endowment or bank, the projected earnings will be realized. But the projected earnings may not be realized in a risky investment.

Same is the case with HLV. Where the individual has a guaranteed government job, the projected HLV is realized. But where the individual is in am contractual job or in business, or is a farmer, or is working in the rural sector dependent on agriculture, etc. the projected HLV is not guaranteed. As with all matters to do with financial wealth, HLV too carries a financial risk.

Some examples of High Risk HLV

There are some persons whose jobs are more or less guaranteed. They will receive their salaries till they retire. E.g. government servants. There are others whose jobs are not guaranteed. Changes in the economy, or in technology, may result in job losses. E.g. those in services sector or in consulting. There are yet others who are not getting salaries, but depend on minor business operations to earn money, much of which may be seasonal or comes with a high degree of fluctuations. E.g. taxi owners/drivers, tour operators etc. There are also farmers and the entire population dependent on farming which is exposed to changes in weather and crop failures for various reasons.

Taxi Drivers: Take the example of a taxi driver who is on an average earning Rs. 200,000 p.a. today. He or she is exposed to a number of risks in earning that money every year. The recent case of corona virus. Since March 2020, the income of taxi drivers has dropped and is almost zero. They may not earn anything for the next 3 months. Virus is not the only risk they face. They also face a risk of the number of drivers increasing and competition forcing a steep fall in the rates that they can charge their customers. In the meanwhile, unable to repay their loans, they will build huge liabilities of interest on interest which will eat into their future income. The HLV of the taxi driver cannot be calculated in the same way as that of a government servant.

Rural Sector: Similarly, take the case of a farmer. In a good year, with adequate rains, a good harvest and a good luck on distribution, the farmer may make good money. But if any of those things fail, the farmer faces a loss. Income drops, turns negative, and huge loans accumulate. The HLV of the farmer also cannot be calculated in the same manner as either the government servant or the taxi driver.

It is time to look at HLV as a financial asset of the individual earning money. For some individuals this financial asset is low risk, while for others it is high risk. For many it lies somewhere in the graph of low risk to high risk.

Why do we need to look at HLV as a financial asset?

Treating HLV as a financial asset is extremely important to be able to sell to HNIs. We have all faced the situation where when we meet a HNI the first thing we are told is that he or she has all the wealth in the world and therefore what is the need for life insurance. Most often we do not have an answer to that objection. Treating HLV as a financial asset is the only solution to selling to HNIs.

Look out for the next article that shows you how to use the concept of HLV to sell to HNIs.