The value of your life
What are you worth economically? One way to measure the value of an individual or a household is to add up what it owns and subtract what it owes. Conventionally, this difference is "net worth" which is measured as assets less debts. This metric is an important measure for it summarizes the financial history of a individual. However, this metric underestimates the "economic net worth" of an individual or household which includes an estimate of any individuals ability to generate future income. Individuals with the time and ability to generate future income possess human capital which can be estimated today given the individual’s education, training and experience. Human capital may be viewed as an intangible asset which can be included with financial assets such as investments and personal property to create an economic asset value. So, how is it measured?
To measure human capital, information about an individual's current age, income, income prospects and preference for the number of years of work life are important pieces of information. Retirees with no interest in future work have a human capital value of $0. Children have human capital value but the trajectory of a child's life is too uncertain for meaningful estimation until they are on the cusp of full-time employment. An age range narrowed from age 18 to age 70 for individuals who have the ability to produce an income captures most who have an estimable human life value.
To illustrate the human life value concept, consider Samantha, a recent college graduate, who is 21 and is at the end of the first year in her career that is currently paying her $50,000 per year. During an interview she expresses, "I have a great family health history, value working highly because earning money makes me feel productive, and expect to continue to work until age 70." That is 50 years of work at $50,000/per year without any adjustments for future earnings increases, decreases, disabilities, income taxes and so forth. Yes, there are uncertain elements but the main point is still valid. Expected human life value today is $2.5 million pre-tax, 50 years of $50,000 per year! That is a lot of economic productivity.
How does that translate to what Samantha is worth today on both net worth and economic net worth terms? The graphic on the right lists what she owns and what she owes. The upper table, her balance sheet, looks familiar for somebody her age. Some cash, a checking account, personal effects that could be monetized by being sold to others, and a car. Add some common debts such as credit card balances, a car loan and a student loan and the difference between her total assets and total liabilities is her net worth. Notice, however, that Samantha owes more than she owns. A negative net worth isn't good. But, how bad is it for Samantha? The answer is not too bad given her age and economic prospects. After all, how could Samantha ever have had her credit card application approved, much less get a car loan, with a negative net worth?
The reason is Samantha's ability to produce an income. The lower balance sheet adds only one element: her human capital. While Samantha's tangible net worth is negative, her primary asset is the capitalization of her skill set from her work.
The value of a life is a snapshot at a point in time. Individual's own different human capital values because different jobs yield different earnings and different earnings growth prospects. Preferences for retirement, openness to mobility, health and income taxes refine further the value of an economic life. The nuances are important for the best estimate of economic net worth. You may find you are worth much more than you think.