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ng the Need for Life Insurance/ How Much is Enough? (A General Concept)

HUMAN LIFE APPROACH

“The present value of the family’s share of the deceased breadwinner’s future earnings”.

The human life value concept deals with human capital. Human capital is person’s income potential. The Human Life Value approach uses mathematical computation to determine how much life insurance is needed by valuing a human life. The Human Life Value approach considers the human being to be an 'income-producing machine.' It is a device that mathematically converts your output into an amount of cash, your expected income until retirement. It determines the value today of cash that is flowing out in the future. This method focuses on an individual's future stream of income. It considers such things as annual salary and expenses, year’s remaining until retirement, and the future value of current rupees and translates this into an amount of insurance needed to replace the income stream in the event of premature death.

What is your Human Life Value ?

Beyond all doubt, your life is invaluable. Yet, there is a certain worth that can be attributed to the financial support you offer your parents, spouse or children. This worth is referred to as Human Life Value (HLV). In the future, if your family does not have the protective blanket of your presence, they will no longer be able to enjoy the benefits of the income you earned. Put simply, Human Life Value is the present value of your future earnings.

Why should you calculate your Human Life Value ?

You should calculate your Human Life Value so you can accordingly invest in insurance plans that provide your family with adequate finances and hence security even in your absence. The human life value concept goes beyond numbers and considers the entire impact caused by the loss of a human life and the value to a person’s loved ones.

How much are your tomorrow’s worth?

What is your Potential Earning Power (PEP)

HLV of any person can be measured by capitalized value of that part of his income or income earning capacity devoted or meant for dependants arising out of economic forces incorporated within his being, like character, health education, training, experience and ambition. For better understanding let us see some illustrations.

Illustration

‘Mr. X’ :- Age-40 yrs, Retirement age-60 yrs, Current salary-3,00,000 per annum (expected to remain same), Personal expenses-1,25,000, Net contribution to family-1,75,000 (300000 - 125000). Suppose he dies at the age of 40. Income lost by the family-175000 * 20 yrs (60 - 40) * discount rate for 20 yrs (Present value factor): 19,00,000.

Illustration

‘Mr. Y’ :- Age-30 yrs, Age of spouse-27 yrs, Life expectancy of spouse-70 yrs, Age of child-3 yrs, Child’s share of monthly household expenditure-10 %, Child will remain dependant till-22 yrs, Monthly household expenditure Rs. 40,000, Out of this, amount spent on Mr. Y 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 liabil