What's Your Life Worth?

As published in the Memphis Business Journal,  June 23, 2006

View as PDF

Attorneys must know the “replacement value” of a life in order to formulate a damage claim in personal injury, wrongful death and wrongful termination litigation. Forensic accountants calculate life worth based on the remaining work capacity that is lost after the damaging event in order to illustrate to a jury that a damage claim was formed in economic reality. A case can pivot on the calculation alone. This article explains some of the basic concepts of economic damages for individuals and illustrates a quick method to figure life worth.

Damages are generally considered to be a lump-sum amount for judgment or settlement purposes. The losses are typically calculated from the date of the damaging event and compounded with interest to the present date, then projected into the future and discounted back to present value. Individuals that can continue to work in a limited fashion produce mitigating dollars that are subtracted from a total loss.

How does one cram a lifetime of lost earning potential into a neat, single figure? The general answer includes:

1. Projecting the expected yearly future earning capacity, over the work life expectancy. The earnings can be based on the working status at the time of the damaging event, or, if the situation warrants, based on reasonable alternatives such as allowing for job promotions and attainment of higher education.
2. Estimating associated employer-provided fringe benefits, over the work life expectancy. Lost benefits can represent a large portion of the damages suffered. A recent U.S. Chamber of Commerce study reports that Social Security taxes, paid holidays and vacations, medical insurance and 401(k) plan (typical large company benefits) can be worth up to 26% of earnings.
3. Figuring the yearly value of household services that can no longer be performed over the life expectancy. The services include the unpaid tasks that maintain and enhance the lives of those that occupy the household, such as food preparation, laundry, cleaning, auto and yard maintenance, and child care. The loss of the production, even though not directly compensated like regular employment, has value to the household nonetheless since the tasks will: a) not be done at all or not as often, b) be done by someone else in the household (at the expense of other things the "someone else" might have been doing), or c) require outside assistance which may have to be compensated. Since most individuals do not keep hourly logs, published studies, like “The Dollar Value of a Day,” help to quantify the hours that typical Americans spend performing the unpaid household tasks and present an hourly rate to measure the value. This loss category is usually considered in a personal injury and wrongful death case and applies to the employed, the unemployed and homemakers.
4. Discounting the annual sums for earnings, benefits, and services to a single present value for the desired lump-sum number.

Many analysts grow the earnings figures each year to account for merit raises using a “real” wage growth rate of around 1% and discount to present value using a “true” interest rate of around 3%. Why such low rates? A method accepted by the U.S. Supreme Court known as “constant-dollar” is often used by analysts to estimate future lost earnings and interest by removing inflation from current rates. Removing inflation, which has hovered around 3% in recent history, eliminates the nearly impossible task of predicting future inflation rates and gives the dollars to be received in the future the same average purchasing power as dollars received today.

The concepts discussed can be best explained with an illustration. In order to simplify the calculations, the earnings are not grown for merit raises and only the future damages are considered. The merit raise growth is accomplished, however, by using a 2% discount rate derived from subtracting the real wage growth rate of 1% from the true interest discount rate of 3%. The Tables referenced allow the reader to calculate his or her own life worth and can be downloaded.

Sarah, a forty-year old, white, female engineer is permanently injured in a car accident and will be unable to work on the job and perform regular household chores and family duties for her husband and two children. She was earning $80,000 annually at the time of injury and enjoyed all of the fringe benefits listed above at 26% of pay, or $20,800 annually (no Table to download for fringe benefits, so use between 20-26% for your own calculation). Sarah’s pre-injury life expectancy (see Table 1) is 42 years, thus she would have statistically been expected to live until age 82. Her pre-injury work life expectancy (see Table 2a) is 21 years, thus she would have statistically been expected to work until age 61. Since Sarah did not keep records of time spent with household chores (and who does?), Table 3 shows that someone with Sarah’s family makeup would typically have worked 32.5 hours per week in the household, valued at $9.97 per hour, or $16,849 annually.

The goal is to figure the yearly future losses and discount them to present value. Table 4 lists factors for the 2% discount rate that will transform an annual payment into a single, lump-sum present value figure. Add together Sarah’s lost earnings and benefits for a total of $100,800. Multiply that figure by the present value factor of 17.011 found in the 21 year row of Table 4 to equal $1,714,708. Multiply Sarah’s lost household services of $16,849 by the present value factor of 28.235 found in the 42 year row to equal $475,731. Add the two figures together to arrive at the total economic damages for Sarah’s lost earning and production capacity of $2,190,439. If you have a financial calculator, solve for present value by entering a payment of $100,800 at 2% for 21 periods, then a payment of $16,849 at 2% for 42 periods. What’s your life worth? Using the Tables, find your own life and work life expectancies, household service hours and rate, and present value factors, then plug your numbers into the “formula” found in the illustration.

Fair or not, the “replacement value” of some individuals is worth more than others due to the loss of a greater working capacity. No one can state with absolute certainty that an individual would have earned “X” amount of dollars for “Y” amount of years, however, if a person is unable to fully work or has died, a forensic accountant can reasonably estimate the life worth by using known facts, statistical estimates and professional judgment.