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t goes for FICA, federal, state, and local taxes, and all other expenses to maintain the insured as a productive asset. The next part of the human life value approach involves plugging the given information into the mathematical model and calculating the answer. To determine the surplus, subtract the self-maintenance expenses from the average income.

Exhibit 2 : Steps for Calculating Human Life Value Approach

Weaknesses of the Human Life Value Approach

Other sources of income are ignored, (e.g., business earnings), it is calculated by using a constant income stream over the life of the insured since it is difficult to know what increase in income is probable.

It ignores the number of years that income (mentioned above) will be required; a person aged 25 and a person aged 65 would appear to require the same amount of coverage.

In its simplest form, work earnings and expenses are assumed to be constant and employee benefits are ignored.

The amount of money allocated to the family can quickly change because of divorce, birth of child, or death of a family member.

The effects of inflation on earnings and expenses are ignored.

Points to Ponder :

One, HLV is a moving target and to make it meaningful, you must review it once a year. Rather than chasing the revised HLV year after year, the aim should be to get the broad trend right with the expectation that in the long-term, the actual and estimate will converge.

Two, do not get overawed by the HLV numbers thrown up. The ——number' is just a starting point and must be put into the context of your present ability to set aside money.

Three, remain disciplined in the sense that at any point in time you should have planned in such a manner that in your absence, your family will not need to compromise on their yet-to-be fulfilled needs.

NEEDS APPROACH

“It is a method of calculating how much life insurance is required by an individual/ family to meet their needs (expenses) if the family head dies”.

These include things like funeral expenses, legal fees, estate and gift taxes, business buyout costs, probate fees, medical deductibles, emergency funds, mortgage expenses, rent, debt and loans, college, child care, private schooling and maintenance costs. This approach contrasts the human-life approach.

The needs approach is a function of two variables:

How much will be needed at death to meet obligations ?

How much future income is needed to sustain the household ?

When calculating your expenses, it is best to overestimate your needs a little. By doing this you will be buying and paying for a little more insurance than you need, but if you underestimate, you won't realize your mistake until it's too late.

With the needs approach, you divide your family's financial needs into three main categories :

Immediate needs at death, such as cash needed for estate taxes and settlement costs, credit card and other debts including mortgages (unless you choose to include mortgage payments as part of ongoing family needs), an emergency fund for unexpected costs, and college education expenses.