Human Life Value Calculations

Life Insurance has always been a rather neglected area in the mindset of the public. Historically consumers have bought life insurance for reasons of tax saving rather than the core need of providing for one's family in case of death of bread-winner. Secondly, the Indian consumers have been unaware that the insurance need changes with every change in life stage (e.g., if one gets married or has children one's need for insurance goes up). As a result only 8% of India's population is insured and the average insurance size is around Rs. 80,000. This implies that people who think they are insured are also heavily under-insured. One of the most significant reasons for this is the inability of the advisor / agent to educate the customer about the true nature of life insurance. They have tried to highlight the product rather than the need. The need for risk coverage / the need to provide for an untimely death is more difficult to explain and hence has been till lately ignored. Aggravating the situation was the fact that term insurance was expensive until recently. Basically, the amount of insurance one should buy is directly dependent on his/her economic value, otherwise known as the 'Human Life Value'. This varies from person to person. 'Human Life Value' is the capitalized value of the net earning of an individual for the rest of his working span. It is, in short, the present value of the total income of the individual, which his lost to the family in the event of his untimely death. Let us take an example,Mr. X, aged 35, earning a gross income of Rs. 2 lakhs today, will retire at the age of 65. Age of a Person ------------------------------35 Age of Retirement----------------------------65 Years to Retirement --------------------------30 Annual Gross Income------------------------ Rs 2,00,000 Personal Expenses + IT---------------------- Rs 56,000 Net Disposable Income -----------------------Rs 1,44,000 Annual growth in Income (10% every yr)--------- 10% Total Income till Retirement------------------ Rs 2.36 Crores Rate of discounting --------------------------------6% Net Present Value -----------------------------Rs 41.24 Lacs If he doesn't return home today, his family will lost this amount forever. Therefore, Mr. X's Human Life Value = Rs. 41.24 Lakhs. A simpler way of looking at it is as follows: Suppose , Monthly income of a person -----------------------------------Rs.10,000 His personal expenses per month------------------------------ Rs.2,000 Monthly income provided to family ----------------------------Rs.8,000 Therefore, annual income provided ----------------------------Rs.96,000 Amount of money to be put in the bankto earn Rs.96,000 pa at 6% interest rate ---------Rs 16,00,000 Hence, HLV is ------------------------------------------------Rs 16 lakhs Please note that however we have not taken into account the future income growth of the person. This is, therefore, not an exact way of calculating the Human Life Value. This is only a representation to give the customer a fair idea of how this works. Normally, when the Human Life Value concept is used, the amount arrived at is much more than what the prospect would have normally thought of. The Advisor, therefore, must necessarily suggest a package, which covers this amount at an affordable premium. For example, if we calculate the premium amount for Rs. 16 lakhs pure term cover for a 32-year-old man, the amount will be roughly around Rs. 6,000 pa for a term of 20 years. This works out to just 5% of his annual salary (annual salary equal to Rs. 1,20,000). Thus, dying too soon or rather planning for uncertainty of life is the most important need that life insurance fulfils. However, there are other objectives that one could have in mind, which can be achieved through life insurance. The important ones being : Living too Long - Retirement Planning Living Death (physical disability etc) Children's Education and Marriage Wealth and Estate Creation Hence, depending on his objectives, the quantum of life insurance can vary.