Wiley

American Risk and Insurance Association

The Human Life Value: A Theoretical Model
Author(s): Alfred E. Hofflander
Source: The Journal of Risk and Insurance, Vol. 33, No. 4 (Dec., 1966), pp. 529-536
Published by: American Risk and Insurance Association
Stable URL: http://www.jstor.org/stable/251227
Accessed: 28-10-2015 05:15 UTC

Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at http://www.jstor.org/page/
info/about/policies/terms.jsp
JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content
in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship.
For more information about JSTOR, please contact support@jstor.org.

Wiley and American Risk and Insurance Association are collaborating with JSTOR to digitize, preserve and extend access to
The Journal of Risk and Insurance.

http://www.jstor.org

This content downloaded from 210.187.26.2 on Wed, 28 Oct 2015 05:15:16 UTC
All use subject to JSTOR Terms and Conditions

THE HUMAN LIFEVALUE: A THEORETICAL

MODEL
ALFRED

E.

The human life value concept is generally associated with life insurance. The
concept, however, is not limited to insurance in its application and has been used
in many other areas of economic theory
and practice. Estimates of the value of
human beings as capital are useful for a
variety of purposes.' An analysis of population and migration could well include a
consideration of the value of the people
involved. Public policies and projects
regarding health, highway construction,
flood control, education,2 and rehabilitation should reflect the extent to which
human life values are increased.3
The desirability of using per capita human capital values as a welfare index has
been suggested.4 Such an index would
reflect present and future mortality,
health, employment, and earnings. Since
all of these factors affect the general welAlfred E. Hofflander, Jr., Ph.D., is Assistant
Professor of Insurance in the University of Texas.
Prior to going to Texas in 1963, Dr. Hofflander
taught at North Florida Junior College and at
Florida State University. He was a Fellow in the
Huebner Foundation and was formerly Editor of

the North Florida Business Review and a Director

of the North Florida Small Business Institute. Dr.
Hofflander is Business Manager of the Journal
of Risk and Insurance and is an Associate of the
Financial Advisory Associates. This paper was accepted for publication in March, 1965.
' Burton A. Weisbrod, "The Valuation of Hu-

man Capital," Journal of Political Economy, Vol.

LXIX (October, 1961), p. 425. The introduction
of this article offers an excellent discussion of the
many uses of the concept.
2 An examination of the change in human life
values due to increased schooling is one way of
determining the monetary value of increased
schooling.
3 Weisbrod, op. cit., pp. 425-426.
4 Ib;.

HOFFLANDER

fare of the people, it might be a better

measure of welfare than current per capita
income which is often used. The main
drawback to using per capita human capital values is the lack of data and difficulty
of computation. On the other hand, it
might be argued that future changes in
mortality should be not be included in a
welfare index attempting to measure present welfare. In this paper an attempt has
been made to outline some of the problems involved in defining the human life
value concept, developing some theoretical definitions, and showing how the concept might be applied to different fields.
The effect of various social and economic programs upon the value of a human life is an important area and deserves
further work, but no effort will be made
in this paper to cover this aspect of the
problem.
The Concept of Value
There are many factors involved in
setting the value of specific property at
any given moment. Because of this multiplicity of elements, it is extremely difficult
to obtain any degree of unanimity among
appraisers. These disagreements are not
due solely to the inherent difficulties of all
economic estimates involving prophecy.
They are more frequently due to a lack
of agreement as to the very meaning of
the word "value." In an attempt to make
its meaning more exact, many have placed
a modifier before the word "value," (e.g.,
fair market, exchange, taxable, etc. ).
These efforts have frequently led to more,
rather than less, confusion because the

( 529 )

This content downloaded from 210.187.26.2 on Wed, 28 Oct 2015 05:15:16 UTC
All use subject to JSTOR Terms and Conditions

530

The Journal of Risk and Insurance

meaning of the modifier often varies from

one area of economic endeavor to another.
This problem exists not only in insurance
(what do we mean by "human life
value"?), but in law, business, accounting,
an economics. The word "value" is a word
of many meanings.5
To complicate the problem further, the
various meanings are often intertwined and
closely related. In an effort to find workable definitions of the concept of value,
court decisions and statutes have attempted to define various types of value.
Many times this only further complicates
the problem because such definitions are
usually suited to the specific situation at
hand and hence do not really help to
clarify the general concept.
Lawyers once argued that there is only
one value and that this value suited all
purposes. To them it was fallacious to assign different values to the same item for
different purposes. They contended that
the "value" or "fair value" of an item was
a definite "fact to be found" and not a
function of the purpose of the evaluation."
In recent years there has been a trend
away from this line of thinking. As Justice
Holmes observed, "A word is not a crystal,
transparent and unchanged; it is the skin
of a living thought, and may vary greatly
in color and content according to the circumstances and the time in which it is
used."7
In insurance it is also difficult to get
agreement regarding the definition of the
terms involved, hence there are misunderstandings and committees on terminology.
In discussing the money value of a man
the term "human life value" is often used.
Just as in the case of the word "value,"
"human life value" can have many mean-

ings. Unfortunately, the human life value

of an individual is not a "fact to be found."
As in other areas of economic endeavor,
the definitions and methods are dependent upon the use of the resulting figures.
Thus, instead of one definition of the
"human life value," there are many, and
each is usually applicable to only one
usage.
Definitions of Human Life Value

It appears that while many authors do

not define exactly what they mean by the
human life value, their ideas regarding
the concept are similar. They would attempt to determine the present value of
future earnings, but some would use gross
earnings, and some would subtract selfmaintenance. What factors they would
consider in discounting, however, seem
vague. In fact, one of the most interesting
things about the human life value is that
few authors have bothered to define the
concept. Most of those who deal with the
subject explain it in terms of an example,
or simply state that it is the capitalized
value of a man.
Dr. Huebner, in The Economics of Life
Insurance, defined the human life value
in two different places. Both definitions
are similar, but they are not identical. He
first defined the human life value as ". . .
the capitalized monetary worth of the
earning capacity resulting from the economic forces that are incorporated within
our being."8 This is essentially a philosophical rather than a practical definition.
In a later section he states that it is ". ..
the capitalized value (at the prevailing
rate of interest) of the current earning
power of the insured devoted to the support of family dependents."9
One of the problems with these defini5 SouthwesternBell vs. Public Service Commission, 262 (U.S.), 276.
tions is that they are somewhat ambigu6 Robert S. Cline, "Valuationof Life Insurance
Assets," (unpublished Ph.D. dissertation, Insurance Department, University of Pennsylvania),
pp. 15-16.
7 Towne v. Eisner, 245 (U.S.), 418 (1918).

8 S. S. Huebner, The Economics of Life Insurance, (3rd ed., New York: Appleton-CenturyCrofts, Inc., 1959), p. 5.
9ibid., p. 18.

This content downloaded from 210.187.26.2 on Wed, 28 Oct 2015 05:15:16 UTC
All use subject to JSTOR Terms and Conditions

The Human Life Value: A Theoretical Model

531

for this year is 0.2, the question arises

whether his wife should insure him for
this year for $8,000 or for $10,000 (ignoring the other discounting factors). If she
is interested in insuring the contribution
he would have made had he lived, she
would insure for $10,000, not $8,000. This
is an example of the same individual having two human life values at the same
Purpose of the Definition
time.
The human life value concept can be
Obviously, this problem can be viewed
used for diverse purposes, and even
as one of semantics. Does this individual
within one area of usage it may have more
have two different human life values or
than one application. But unless the huare they two different concepts, one, or
man life value is unaffected by tlhe purboth, or neither of which is the human life
pose for which it is to be used, it is not
value? It is possible, but perhaps not feasione value, but many values. The question
ble, to call the first concept "human capithen is whether the human life value
tal," and then to give other names to the
for an individual is fixed, or whether it is
different modifications in order to distina function of its purpose. An example will
guish one from another. Because of its
show that the latter is the case.
long association with the life insurance
In determining the human life value of
field, the "human life value" would no
an individual for inclusion in national
doubt be used when referring to the life
wealth (assuming the inclusion is proper),
insurance concept.
one would discount the earnings for many
The purpose of determining the human
factors, including mortality. If, on the
life value for life insurance (for this work)
other hand, one is interested in determinis to find that single sum which, on the
ing the human life value of a member of
average, represents the amount necessary
this group to his wife for life insurance
to replace that which an individual would
purposes, the discounting factors would
normally have provided for his family had
not include mortality. One would not dishe lived. The sum is the present value of
count for mortality because the object of
an individual's stream of income (less selfthe insurance is to replace that portion of
maintenance) .
a man's income that would normally go to
Since this sum is to be used as a guide
his wife and family had he lived. To disin determining the amount of life insurcount for mortality, then, is to discount
ance to be purchased, it will be discounted
for the very factor which is being insured
for interest and all factors (except moragainst.
tality) which might prevent the earning
Assume that a man is earning $12,000
of the income. Thus, if only ninety-six per
per year and consumes $2,000 on selfcent of a certain homogeneous group (as
maintenance. If his probability of death
to profession, age, health, locality, etc.)
1 Griffin Lovelace did not define
the human are employed, then the average future
life value, but an example which he used is such gross earnings of this group should be
that he apparently was considering a concept
which was similar to Dr. Huebner's original de- discounted for this factor in determining
finition. For a fuller discussion of the history of the human life value of a member of this
the Human Life Value Concept, see A. E. Hoff- group. This is done because there is only
lander, "The Human Life Value: An Historical
Perspective," Journal of Risk and Insurance, a .96 probability of an individual's earning this wage. The four per cent may not
September, 1966, p. 381.
ous. In capitalizing the current earning
power, no indication is given as to what
factors other than interest are to be considered. Because of this, it is impossible
to know exactly what the author had in
mind when he defined the human life
value in this manner.10

This content downloaded from 210.187.26.2 on Wed, 28 Oct 2015 05:15:16 UTC
All use subject to JSTOR Terms and Conditions

532

The Joturnal of Risk and Insurance

be working due to a number of causes;

there is no way of predicting which members of this homogeneous group will be
unemployed in any further year.
In the area of disability income insurance, the human life value will be used to
compare the present value of future benefits for individuals who are disabled, to
the present value of future earnings if
they had not been disabled. The present
value will be found by discounting for all
factors, except disability, which might
prevent the earning of the income. The
probability of becoming disabled is ignored in this instance because the purpose
of the end result is to determine what the
individtial would have earned if he never
became disabled. Thus, there is no discounting for the probability of becoming
disabled.
In applying the human life value to
company underwriting of life insurance,
the same techniques will be used which
were employed as a guide in determining
the amounts of life insurance to purchase.
This is because the two are in reality only
different facets of the same problem. The
company is interested in the "correct"
amount of insurance so that it may be
able to reject applications for amounts
which represent overinsurance. The insured, on the other hand, is (or should
be) interested in determining the "correct"
amount of insurance so that he will not
be unprotected.
The same is true when attempting to
establish the money value of an individual
in cases of recovery for wrongful death.
In this situation, however, one would discount for mortality as well as other factors
because here account should be taken of
the chance that the individual would not
have lived to earn future income.
A Simple Mathematical Model
For the individual whose human life
value we seek to define, let us presume a
large homogeneous group of individuals,

to which he belongs. Assume that these

individuals are all of age x nearest birthday and that their average age is x (an
integer). Analogous to this group is a
mathematical model called a survivorship
group, S, formed by Ix persons entering
it-all at one time-at exact age x and
subject to prescribed mortality rates. Let:
x

attained age of a life in S (an

integer); this is an exact age, i.e.,
age on a birthday; similarly y
a life aged x in S
(x)
w
limiting age; youngest integral
age to which there are no survivors in S
the number of persons in S aged
lx
exactly x; lx + 1/2, ly + ?2 are defined analogously
the fraction of the lx persons in S
fX(e)
assumed to be gainfully employed
at exact age x
estimated wages of each person
wy
in S who is alive and employed
throughout the year of age y to
y + 1 (whether wy is an estimate
for healthy lives or an average for
all employed lives depends on the
purpose)
my-= estimated cost of maintaining
each person in S who is alive
throughout the year of age y to
y + 1
(1 + i)-t
the present value,
vt
under compound interest at annual rate i, of a unit sum due in
t years
The wage, maintenance, mortality and interest rates are selected so as to reflect
expected future experience of the homogneous group. Let Hxn) denote human life
value of (x) according to assumption (n).
What form should a mathematical
model take so that it could be used to
analyze the need for life insurance, disability income insurance, recovery in cases
of wrongful death and the underwriting

This content downloaded from 210.187.26.2 on Wed, 28 Oct 2015 05:15:16 UTC
All use subject to JSTOR Terms and Conditions

The Human Life Value: A Theoretical Model

533

problems of life insurance companies?

(e)
Four possibilitiesare:
the group representedby fy?+ is always
w-1

(e)

w 1

(l)

H,

(w-y+12

composed of those in the fy+ l group,

plus additional members added from the

y+l( 12-

+(e)

fy+1/2 v

y=x

(e)

w-1
(II

(1
(W,y

12

my) y+i
(e)

(III)

~~(e)

H,,

(II)
y+1/2-x

y+1ll2-x

(Wyfy+1/2-My)

ly+l12 v

y =x
w-1
y+1/2-x

(e)

(IV)

Hx

(wy fy+1/2-

my)

~f,Ml) class, then there might be

fy+1/2

~~~(e)

W-1
(III)

i-

lx v

y =x

(I)

Definition for Life Insurance. H x represents the present value of the future
gross earnings of the group. If this figure
(v)

is divided by lx, the result H. , is the

presentvalue of the estimatedfuture gross
earnings of any member of this group.

some validity in using H. as the definition of the human life value under certain
circumstances.Unless special information
exists to the contrary,however, one cannot assume that those who are unemployed in one period are the same as those
who are unemployed in the subsequent
period. The given assumption regarding
the homogeneity of the group prohibits
such an assumption in this case. Since
there is no way to determinein advance
which of the members will be in the unemployed group, one must consider the
total class.
(III)

w-1
H1

(WY

ly+l/2

fy+1/2

/)

(Ix

y =x

If the purpose of life insurance is to replace the average future gross earnings
of the group, then this would be, on the
average, the correct amount of life insurance to purchase."1While this figure has
the advantage of simplicity, it ignores
many factors, including the cost of selfmaintenance.
(II)

Hx rectifiesthis by taking the present

value of the gross future earnings of all
those who are working, less the cost of
maintenance of all those who are alive
(including some who are not working,
but are, of course, consuming). This appears to be the concept being aimed at,
for here those who are not working are
consuming either past surplus (savings),
or future surplus (borrowing). This surplus is not available to dependents and
hence should not be included in the individual'shuman life value. This expression

Hx is the present value of the future

gross earnings of the gainfully employed,
(VI)
less the cost of their self-maintenance. divided by lx, H.

w-1

(e)

This figure divided by fx

(VI)

H,=

w-1

(e)

wY fy+1/2-my)

+l /2-x
'1y+1/2 vy1)

y =X

would be the average human life value

for life insurance purposes except that
f,,
y=x
is essentially the present value of the over time the wages and self maintenance
net future surplus of those continually reflect the mortalityof the original group.
employed. If the assumptionis made that
(IV)
11At this point the decreasing protection under Hx corrects this defect by providing a
net wage figure regardlessof mortality.
permanent forms of life insurance is ignored.
(VI)

H,,

(W

(Y,f2

- my)

(1y+l1

y+1 /2-x

(e)

2fy+l1

2V

(e)

This content downloaded from 210.187.26.2 on Wed, 28 Oct 2015 05:15:16 UTC
All use subject to JSTOR Terms and Conditions

534

The Journal of Risk and Insurance

w-1

1
(e)

(VI)

Hx

wy fy+1/2-my) k1y+1/2V

X-

Definition for Wrongful Death'2

y+l/2-wx

y =x

(III)

(IV)

Dividing Hx

ing at age x ( ,), then the result is

(VIT)

by l, yields Hx

w-1

w-1
(VII)

Hx

(e)

X
y

(wY

fy+l

/2-my)

/2-x
V

Ix < r
-

1
r

HI

initial age of the survivorship group

age at which dependency
ceases
retirement age

12
The equations developed in this section are
also applicable to employer's liability.

1
(Wy

fy+l/2-my)

(1y+1/2

)+

VY

y=x

Using this expression, values for all

ages from zero upward can be obtained,
but are these figures meaningful for the
purposes for which the expressions were
derived? Apparently not. During childhood (from x=O to about x=18) there
is no one who is dependent upon the individual for support. Usually the only ones
with an economic interest in the child
are his parents. The economic interest of
the parents is generally limited to their
investment in raising the child. (This, of
course, ignores the prospect of future support of the parents by the child. Where
such future support seems realistic, some
measure of the value of the prospective
support should be allowed.)
Because of this, the amount of life insurance (or the amount recoverable for
wrongful death) may not bear any relationship to the human life values at the
early ages. This is especially true due to
the problem of determining the type of
profession that the child might have followed in later years.
During those years after retirement, the
human life value is negative. At this time,
the human life values and the amounts
of life insurance may bear no relationship
to each other. Hence, the restriction that

where: x

is divided by the number liv-

If H,

or
w-1
(e)

(VII)(

Fi

(Wy fy+l /2 1y+1 /2i /l

y=x
{
-(my

/2-x
y+l~~+

ly+1/2)

/lx]

Now through a term by term examina(VIII)

tion of Hx

(e)

a better understanding of
(e)

its meaning may be obtained. (fy + %ly+

) Ilx is the probability that an individual
in year of age x will be alive and working
in year of age y + 1/2.From this is subtracted the cost of self maintenance in
year of age y + ?/2.When discounted it is
(VIII)

(VII)

identical to Hx

except that Hx

dis-

(VIII)

is the mathecounts for mortality. Hx

matical expression for the human life
value for recovery from a third party for
wrongful death'3 (the range of x discussed above is still pertinent).
Definition for Disability Income
The case of disability income is similar
to recovery for wrongful death in that the
discounting factor includes death. It is
different, however, in that those who are
unemployed due to disability are not included among the unemployed. Thus
(VIII)

Hx
13

is adjusted to
One theoretical consideration which may be

ignored in practice should be pointed out. When

Equation (9) is applied to tort liability situations,
the mortality statistics used should be "net" of
the probability of being killed by a third party.
If this is not done, then one will be discounting
for the factor that is being isolated.

This content downloaded from 210.187.26.2 on Wed, 28 Oct 2015 05:15:16 UTC
All use subject to JSTOR Terms and Conditions

The Human Life Value: A Theoretical Model

535

factors inherent in the human life value

itself; and (2) the existence and dependWY lyy+l'2
H.=
y =x
ence of the beneficiary.'6 Thus, to purchase the same amount of insurance rey+1 /2-x
gardless of the age of the beneficiaries
-my
1y+1 /2 V
ignores the probability that the dependwhere:
(i)
ents might not be alive to need the infn is the fraction of the Inpersons assumed to be
come of the breadwinner. This may be
(i)
disabled at age n. Where fy+1 2 is very small,
into account in two ways: (1) projtaken
(VIII)
(IX)14
ject the self-maintenance figures so that
H.
may be used as an approximate to Hx
they reflect the age of the beneficiary; or,
Human Life Value and Dependence
(2) adjust the human life value equation
In the previous section there has been to reflect the probability that the dependshown the development of several matJie- ent may not be alive to need the income.'7
matical expressions for the human life
(VII)
value. They are lacking, however, in that For the latter case, H,
can be adjusted
there is no discussion of the primary to
issue, viz., "value to whom." Thus the
w-1
value will be different depending upon
(Y
-my) (y+1/2-xPz)
whose benefit is being considering. The Hx:z,=
y =x
expression developed for life insurance
represents the present value of all of an where y+1/2-xPz = probability that a wife aged z
survives
individual's net future earnings. It may
y+1/2-x years (not necessarily according to
the same mortality rates to which her husnot be necessary, however, for a man to
band is subject. Thus
purchase this amount of insurance cover= lz+y++1/2-x/lz
y+1/2_xPz
age, because the use of this total implies
that there will be someone continuously (from the mortality table for wives.) A
dependent upon his wages until retire- simpler method when there is more than
one dependent would be to use a series of
ment, and possibly thereafter.
one for each dependent, and
summations,
It follows from the above that a man
based
the
upon
proportion of the breadwhose only dependent is a wife aged 20
winner's
income
which goes to that dewould not purchase the same amount of
pendent.
insurance as a man who has a mother of
In life insurance programing, the prob66 as his sole dependent. To consider the
probability of the dependent being alive ability of the dependent's living until the
adds a new dimension to this analysis. death of the breadwinner is generally asUp to this point, the discussion has re- sumed to be certainty, the one notable
volved around the question of what the exception to this being the survivorship
wage earner would have contributed to annuity which promises to pay a life inhis family, but the family by its very ex- come of a specified amount to a desigistence affects his value.'5
16 The necessity of such dependence has been
The human life value of a person to his recognized in the doctrine of insurable interest.
17 While this discussion is couched in terms
dependent is contingent upon (1) the
w-1

(e)

(IX)

i)

(fy+1/2+fy+1/2/

14

Unfortunatelydata are not available to apply

either modell
15 The existence of the family was also noted
and accounted for in determining what portion
of the man's income was consumed by him and
what portion by his family.

of life insurance, the same principle is also valid

in the application of the concept to underwriting
and cases of recovery for wrongful death. Cf.
A. E. Hofflander,"Loss of Income Due to Wrongful Death: A Method of Measurement,"Insurance Law Journal (February 1965), pages 92101.

This content downloaded from 210.187.26.2 on Wed, 28 Oct 2015 05:15:16 UTC
All use subject to JSTOR Terms and Conditions

536

The Journal of Risk and Insurance

nated beneficiary if the beneficiary survives the insured. The probability of the
dependent's continuing to live after the
death of the breadwinner is considered in
programing through the use of settlement
options based upon life contingencies.
While he may be aware of this distinction, there are two reasons why a prospective insured might wish to ignore the life
contingencies of his dependents. He may
wish to purchase an amount of insurance
equal to his human life value, making the
assumption that his dependents will still
be alive and be in need of his support.
This would be a conservative approach,
and considering the importance of the
undertaking, it is not completely unlikely.
On the other hand, he may be aware of
the fact that the funds provided by his
insurance will be more than are needed
by his dependents, but may wish that the
excess, if any, be left to some charity or
similar organization.

Summary
Very little effort has been expended in
investigations into the meaning(s) of the
human life value concept, most authors
being content with a general statement
regarding its usefulness. The human life
value is not one value or concept, but
rather it is many values. Each value must
be defined carefully in order to be appropriate for its expected use. This paper
develops four models or mathematical definitions of the human life value.
Unfortunately these models are at the
moment, only theoretical because the data
necessary to use them are unavailable.'8
As in most fields of endeavor, abstraction
precedes realization.
18For a discussion of the problems involved
in obtaining data on age, income, and occupation,
see A. E. Hofflander,"Salary Scales: An Aggregate Approach," Journal of Risk and Insurance,
Vol. XXXII, No. 4 (December, 1965), pp. 571-8.

This content downloaded from 210.187.26.2 on Wed, 28 Oct 2015 05:15:16 UTC
All use subject to JSTOR Terms and Conditions