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How high is my Human Life Value

Quick, answer this question….Do you know if you have the right amount of life insurance? If you are unclear about your answer, then chances are you are like most Indians and do not have the suitable or relevant amount of coverage, according to your Human Life Value.

Most of us in India usually buy insurance for tax related savings during the final months of the financial year. But insurance is a protection instrument first and only then can we look at it for tax savings. When bought for the wrong reasons, we end up having either too much or too little coverage.

The purpose of insurance is to replace your income that is lost when you are longer there in order to continue to support those that are financially dependant upon you and to fulfill the financial obligations that you are contractually bound to.

For instance, you might be the sole breadwinner in the family and have a ten-year-old daughter who’s wedding expenses you will need to fund in fifteen year’s time. However, if something happens to you today, your daughter will still need to incur wedding related expenses but might not have a surviving parent who can afford it. If you have insurance, then you could get the right amount of insurance coverage such that the expenses to be incurred at the wedding event ought to be covered by amount that the insurance company will pay your survivors if something happens to you. And this brings us to the right amount of insurance coverage that a person needs.

There is a simple mathematical calculation that can help you arrive at how much coverage you need. This figure is called Human Life Value and you might hear insurance professionals using this technical term. As discussed below, the amount of coverage you need might vary over time depending upon your then prevailing life situation. Industry practitioners often prescribe that the amount of insurance once should have should be 5x – 10x one’s current earnings. While this is directionally right, it is possible to get an even more precise answer. You might ask if you can get an unlimited amount of insurance, and the answer is no. Ultimately the amount of insurance you get must have some relationship to your current and potential earnings capacity.

What you need to calculate is what are the financial resources your dependants need to live their lives if you are no longer around or are physically disabled. One way of doing this is to calculate what are your current and future financial obligations, both in terms of your family’s future needs and your currently outstanding liabilities. Some examples are:

• Paying for your spouse’s living costs if he/she is not earning, adjusted for annual growth, till their life expectancy
• Paying for your child’s expenses (education, marriage) until he/she becomes financially independent
• Paying off the outstanding home loan for your home purchase
• Paying off any other loans outstanding (car or personal loans)

The sum of all the above obligations will give you the total amount of protection that you need, your Human Life Value. Once you have this amount, subtract from this any assets that you might have. Some examples of these are:

• Liquid cash in current or savings account
• Current value of stock market investments
• Existing property or assets (second house, commercial property)
• Available share of inheritance from parents
• Retiral accounts such as PF, PPF
• Any existing insurance protection you might already have

The net of the above two amounts will tell you whether you are over or under-insured. If the sum of your assets and existing policies do no cover your financial liabilities, then you are most likely under-insured.

If you have no financial dependants, then most likely you do not need any life insurance coverage. Similarly, you don’t need to buy life insurance for your school going children because they do not have any income and they are not supporting you.

Financial dependants are persons whose lives would be materially affected if your income were not available to provide the support and assistance that was previously available to them. They are persons who are dependant upon your income for their expenses and living costs. While they are usually immediate family members, you might have financial dependants who might be a part of your expanded family.

Lets give you some examples:

• Your spouse who might not be working
• Your children whose education costs, living expenses you are responsible for
• Your retired parents who look towards you for their financial support, healthcare costs and living expenses
• Your siblings who might not be working but are being supported by you

You must evaluate your life insurance coverage annually or in the very least whenever your life’s situation changes. The following are recommended events around which you must revisit your insurance coverage, because your financial situation will change as a result of these events (i.e., your Human Life Value will change around these events).

• Change in marital status – whether you get married or divorced
• Birth and death in the family that add to or reduce your financial dependants respectively
• Buying a house
• Moving to a bigger house
• Taking a home loan to purchase a house
• Change in job which results in a higher level of income
• When your kids become financially independent
• When you reach retirement age

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• You don’t usually need life insurance if you do not have financial dependants
• You don’t need to buy life insurance for your minor kids because its not a financial loss if they were to die, its an emotional loss
• Evaluate your insurance needs annually, because your needs will change as your income grows or family size changes
• Identify what is the cheapest and most efficient option for you. Not all policies are suitable for everyone
• Don’t think of insurance as a tax saving alone, think of it as a protection instrument

Comments

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gaurav said : 31/05/2010	1) Maximum sum Assured one can choose under individual term plan. 2) How it directly co-relate with salary. I mean to say that if one salary is Rs. 7 lakhas p.A then maximum sum assured he can take.How much multiply is the sum assured with Yearly salary or Monthly salary. 3) Is it vary with case to case
S M MANCHANDA said : 17/02/2009	At younger the first insurance products to be bought should be term and whole life insurances. Ensure that your minimum cover is 15 times your annual income. Endowment insurance should be bought at a later stage when one is entrusted with higher family responsibilities. Other products that need early attention are pension plans.
smmanchanda said : 07/02/2009	This is the first time that someone is talking about humanl life value while selling life insurance. Though pure term insuarnce is an essential product to protect HLV yet people shy away form it and if buy they buy, they buy wrong way, sat short term and and get irritatecwhen asked for medical. Educate and tell them that there is no substitute for Term Insurance.