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A price on your head: determining the value of a 'life'

Reinsurance Group of America are asking 'How much is life worth?' The article goes on to say 'From a strictly fiscal perspective, however, determining a person’s long-term financial value is exactly what financial underwriting in life insurance seeks to do.' Click here to read more. They have their approach, and, frankly, I dispute the idea that they are determining a person's long-term financial value. They are determining insurable value. The interest that I have in my life is clearly unlimited. The care that others show for that life is limited. The difference is the measure of risk in our society. Insurance is an attempt to bridge the gap a little - by allowing for financial risk transfer so that some of my future value to my family, and the folks I borrow money from, can be replaced should I die. But provocative titles get clicks, and most of us are here for commercial reasons, so I understand.

Different approaches to establishing the value of a life can offer good tools for the professional adviser, life insurance marketer, and would-be digital advice designer. Finding simple ways to get the consumer to think about what they should insure and for how much are central to those roles. Especially since we know that, typically, most consumers a) don't like thinking about really bad news like death and disablement, and b) don't like doing maths.

Given that knowledge here are some uncommon suggestions for talking about values for insurance:

  1. Use the Government's number: "You are worth 3.35million to the government, how much of that do you have insured?" Using a report issued a little while ago by New Zealand Transport you can check out the value of a statistical life. Now, this isn't going to be a match with most reinsurer's views of the insurable amount for most lives. I didn't expect it. But it is a useful challenge to the majority of people currently buying $200,000 life cover and no income protection.
  2. Ask "If someone took away every physical ability, but left you alive, how much compensation should we sue for?" This is not a ridiculous question - I wish that it was. Each year some people left totally and permanently disabled - for sake of argument, think of quadriplegia. They have to be compensated. There is also a method in the madness. Fewer people are suffering early death (before age 65) and people find it easier to think about the consequences if you keep them in the picture.

    In New Zealand ACC handles the payments to the person, but in the UK private settlements must be made. An example is available at this link - it suggests GBP 1.5 million to GBP 3.5 million pounds. Arguably, ranging from the current level in the question above to about two and a half times more. It also handily underlines the problem of projecting costs, and therefore compensation, over a lifetime. The answers, after a bit of stammering, will probably amount to more than the person can afford, so the budget window then becomes the main determining factor. With luck, you have have pried open the budget just a little bit.

Of course, there are perils with over-insuring your life. These are well known, and you can rely, to some extent, on insurers to protect you: they share your concern, as over-insured lives don't live as long, and become bad claims disputes when they are murdered. But it is also rare, and the balance of probabilities is that your cover is low - particularly your income protection insurance.

 

 

 

 

Comments

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PeerCoverNZ

We can also look at Pharmac's qualy's. Based on 1 life = 80 qualy's, the VOSL is somewhere between $1m & $8m. https://www.pharmac.govt.nz/assets/economic-assessment-guide.pdf

All these estimates are based on how much we as a society are willing on average to spend to stop an avoidable death/injury.

How much one should insure for is more about indemnification so that one's dependents' qualy's are maintained before/after one's death. I would be surprised if this amounted to the VOSL for most kiwis.

Not sure where your personal interest in your life (infinite) comes into the equation. Dealing with infinites is difficult from a risk management perspective. Maybe there is another blog post in that.

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