Calculate Human Life Value in Insurance

Human Life Value

The concept of Human Life Value in Insurance is something that we all hear about especially from the insurance agent but hardly have we known to calculate. The reason being there is no definitive source of information on the subject. Here we have an example to understand.

Example 1

Here's an example to understand this better. Let's calculate the HLV of Raj, who is married and has a child. In the table all the information about Raj, his family and their needs is provided. A couple of points from the table need to be explained in more detail

Particulars
Raj's age	Years	30
Age of spouse	Years	27
Life expectancy of spouse	Years	70
Age of child	Years	3
Child's share of monthly household expenditure	%	10
Child will remain dependent till	Years	22
Monthly household expenditure	Rs	40,000
Of the above, how much is spent on Raj	Rs	10,000
Expected inflation in household expenditure	%	5
Money to be set aside for child's education (in present value terms)	Rs	10,00,000
Money to be set aside for child's marriage/other needs (in present value terms)	Rs	7,50,000
Outstanding loans	Rs	15,00,000
Other liabilities	Rs	5,00,000
Medical expenditure/emergency fund	Rs	5,00,000
Rate of return on low risk securities/deposits	%	8
Human Life Value	Rs	16,645,475
If the rate of return on low risk securities/deposits is	%	7
Revised Human Life Value	Rs	18,183,996

Let see another example, where HLV is calculated for Mr. Vikas Rao based on the present needs and income. Mr. Vikas Rao aged 41 years has an annual income of Rs.10 lacs, spends Rs.3 lacs on his personal expenses (including Taxes). He has Fixed Deposits of Rs.6 lakh. He also has a loan of Rs.10 lacs and plans to spend Rs.10 lacs each on his son’s education and his daughter’s marriage. His human life value will be as follows.Example 2

 

Particulars
Annual Gross Income	10,00,000
Less : Expense on Self including taxes	300,000
Contribution to Family Standard of Living	700,000
Multiplying factor	15
Gross Human Life Value	1,05,00,000
Less : Liquid Assets	600,000
Add : Liabilities	1,000,000
Add : Amount to fulfill family needs like daughter’s marriage & son’s education	2,000,000
Human Life Value	1,29,00,000

 

Expenditure on self-Maintenance (1/3 of gross income for people. This also includes varying tax liabilities) Liquid assets .These would be available to the family in the event of the death of the breadwinner. It does not include the value of other assets like property or jewelery since it is the value of other assets like property or jewelery since it is assumed that the family would continue using these assets.

 

Age	Multiplying Factor
Upto 35 years	25 times
36 to 40 years	20 times
41 to 45 years	15 times
46 to 50 years	12 times
51 to 60 years	10 times
61 to 65 years	5 times

The Human Life Value (HLV) is just indicative and a starting point in reference to your current ability to set aside money for you and your family’s future financial security. There are ready calculators available for calculating the HLV based on current and future income and expenses. You can also contact your financial advisor for arriving at the optimum amount of cover through HLV.

Once you are convinced with the amount, you can choose various life insurance plans for covering yourself. Policies like term assurance plans, traditional plans and Unit linked plans are available with all the insurance companies providing. While term assurance & whole life insurance plans are purest form of insurance with no returns, Unit Linked Plans can give you good returns in the long term.