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ities Rs. 5,00,000. Medical expenditure/ emergency fund Rs. 5,00,000. Rate of return on low risk securities/ deposits 8 %. Hence, HLV will be Rs. 1,66,45,475. If the rate of return on low risk securities/ deposits is 7 %, Revised HLV will be Rs 1,81,83,996.

How do you determine your Human Life Value ?

This approach is about determining how much insurance is needed and is based simply on how much income the proposed insured earns. 'All individuals who have financial dependants need life insurance.' Factors to be taken into consideration while calculating HLV are age, current and future expenses and current and future income.

The formula is;

Annual Income / Interest Rate = Lump Sum (The Human Life Value).

Illustration

If the annual income of the primary wage-earner is Rs.30,000, the total amount of insurance needed would be (assuming a nominal rate of interest of 8% and a long-term inflation rate of 3%, the real rate of interest is 5%):

Rs. 30,000 ÷.05 = Rs.600,000 (human life value = amount of insurance required)

If Rs.600,000 is invested at 5%, the return will be Rs.30,000 annually. Thus, the family of the insured has, in economic terms, would replace the income-earning value of the life lost through a policy with a Rs.600,000 death benefit.

Illustration

An insured makes Rs.42,000 a year and the current interest rate is 3.4%. She has a generous policy plus disability benefits that pay 70% of her salary. How much life insurance does she need based on capitalization of income?

A. Rs. 1428

B. Rs. 12352.94

C. Rs. 1,42,800

D. Rs.1,235,294.10

There are different school of thoughts and approaches for purchasing and calculating the needs of life insurances, which say as under :

One should purchase insurance worth 5 to 10 times the current annual income. “This is an old thumb rule that does not take into consideration current assets and any special needs the customer or their family may have”. Thus,

When one’s annual income is known, the insurance need is calculated simply as annual income multiplied by the number of years to service left.

One’s yearly outgo towards Insurance premium should be 10% of one’s annual Income. Thus,

Life insurance need is, the financial need analysis approach. This is an approach which can take care of specific needs of an individual. Here, the basic objective is that the insurance coverage should be sufficient to provide for the dependants’ needs in case the breadwinner dies early.

Steps for Calculating Human Life Value Approach

In the human life value approach, the first step is to find the amount of annual income that is surplus to the individual. The surplus is the amount above what the insured would consume himself; which provides the overall standard of living for the individual and the family. The surplus includes amounts spent on education for children, automobiles, vacations, clothing, and food for everyone in the family except him. The items to include in costs of self-maintenance are any money spent on his portion of housing, his clothing, food, the portion of his salary tha