To insure a car, home, or any other material asset, the general procedure involves valuing them in terms of rupees as per its market value. But what about life? Determining how much you are worth and insuring it is a surely no easy task The Human Life Value (HLV) approach comes to your rescue here. It calculates your life’s worth, and expresses it in rupee terms, thereby helping you decide a suitable life cover.
Life sure is priceless and one can really not attach a value tag to it. The Human Life Value calculation is an indicative value and assists you in deciding the insurance amount. It serves as a guidance to arrive at an appropriate value for your family’s secure financial future.
Getting to Know HLV Better
The Human Life Value approach calculates the amount of money that would be required for your family to sustain the same lifestyle and standard of living, in case of your untimely death, It is the amount which your family would require to not only meet their day to day household expenses, but also to achieve their financial goals- of children’s education or marriage.
Technically, the approach calculates the value of money, that is expected to be earned over an individual’s life time, expressing it in rupee terms. This value of money is adjusted for inflation to get a more accurate value.
Factors to be Considered in HLV Calculation
While calculating a suitable life cover, through the Human Life Value, the following factors are considered. These factors, help in assessing financial needs and goals better and thus arrive at a suitable life cover.
- Years till retirement: What would be your age of retirement and for how many more years you would have to provide for your dependents. For your spouse, you should cater to his/her remaining lifespan. In the case of children, you could consider till their higher education or marriage goals are met.
- Number of dependents: Not just the number of dependents, bear in mind to list out their individual financial goals that you wish to save for.
- Your current income expenses- What’s your monthly household expenditure- on children, household and lifestyle expenses.
- Loans and liabilities- Loans such as home loans, personal loans and even credit card dues if any should be included.
- Existing investments and savings: What are your assets and savings?
Calculating Your Human Life Value
Calculating the HLV may sure seem a complicated procedure for many, however technically speaking it isn’t really so. For practical purposes here is a simplified version to understand how it goes about.
Step 1- Determine your anticipated annual income over your remaining earning years, after deducting personal expenses.
Step 2- Calculate Present Value of future income, adjusting for inflation. (You could use the PMT function in excel to help you calculate this)
Step 3- Add your loans and liabilities and amount required for financial goals,
Step 4- Deduct current savings, assets and investments to arrive at the final value.
Let us understand this better with the help of an example.
Ravi, age 30 years works for a software company. Married with a 2 year old son, he plans to retire in another 20 years, at age 50. His gross annual income is Rs. 6, 00,000 and his personal expenses work out annually at Rs. 1, 20,000.He currently has an outstanding home loan of Rs. 20, 00,000. He also wishes to save Rs. 20 lakhs for his son’s future. His current savings, fixed deposits, investments and other assets sum up to Rs.10, 00,000. His investments on an average fetch him 13%. Let us assume the inflation to be 9%.
Calculating Ravi’s HLV…
Ravi must this insure himself for Rs. 99,64,909 to ensure his family’s needs and goals are met, without having to compromise on their lifestyle.
A Final Word….
The factors that are considered for the calculation of the Human Life Value are not constant and vary with the passing years. Thus, to make the whole process meaningful, it is advisable to review your insurance needs regularly. Another point that must be kept in mind is that the HLV is just an indicative value. It should be used as a guideline, and the final insurance portfolio should be worked out as per your individual financial position, liquidity and ability to save money.
*Featured Image: Pexels