Methodologies for Estimating the Value of Life

How is the value of a human life calculated? There are several different ways of calculating the value of a life, based on market approaches, legal approaches, compensation for accidental death, and methods used by the government for medical and environmental policy purposes.

Estimates of the value of a life under alternative approaches are summarized in the following table, with details on how the estimates were derived described in the sections below.

1. Market Approach: Asset Valuation

A market approach to valuing a life might consider a person as being like any other asset, in particular, a kind of intellectual “property”, so to speak. There are three primary means for determining the value of intellectual property (IP). The first is the Cost Approach, which considers the value of IP as the cost it would take to reproduce the asset, that is, build it from scratch. The, second approach to valuing IP is the Market Approach, which looks at similar types of IP that have recently been bought or sold in the marketplace, and assigns a value to the IP based on these similar transaction prices. The third approach to valuing IP is the Income Approach, which assesses the value of IP as the present value of future benefits to be derived from the IP.

Clearly, the Cost Approach and the Market Approach are not relevant here. However, we could consider the Income Approach and assign a value to a person based in the present value of his future income. So what does the average American make? Here are the data from the US Census.

What the data show are that there are big differences in income depending on your age group, that is, people have different incomes at different stages in life. The data also show that the mean values are larger than the median values, which means that income is skewed, that is, there are some people in every age group with much larger incomes than the rest of their cohort. Taken together, these data suggest that the value of a life, or, more accurately, the value of the loss of a life, using the income approach will depend on (1) how old the person is and (2) how much income he has.

Using these income numbers, I calculated the income “value”, assuming a person lives to be 75 and using a 3% discount rate, in 4 ways (1) assuming the individual has the typical 2008 US median income, $26,513, for his whole life; (2) assuming the individual has the typical respective 2008 US median incomes at his different stages of life (e.g., $9,862 when he’s 15 to 24 years old, $30,182 when he’s 25 to 34 years old, $35,767 when he’s 35 to 44 years old, etc.; (3) assuming the individual has the typical 2008 US mean income, $38,376, for his whole life; (2) assuming the individual has the typical respective 2008 US mean incomes at his different stages of life. These results are presented in rows [1] through [4] in the summary table above.