Bridge your insurance gap with Human life Value (HLV) approach

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One cannot put a monetary value on human life; nevertheless, assigning a relative value is attainable. It must be tied to what will be lost in the event of the person’s death. This is the present value of an individual’s expected future earnings that will be utilised to support dependents in the event of a life event. That said the human life value (HLV) or income replacement strategy is a technique for determining the right amount of insurance that a person should purchase now in the event of future income loss.

By comprehending a person’s HLV, one can assure that the family member’s standard of living is unaffected even when the earning member is absent. In simple terms, it is founded on the axiom that the worth of an individual’s life is equal to his earning capacity. And in the event of his death, it is his or her current and future potential income that represents the family member’s true financial loss.

Thus, in that situation, the sum insured should cover the loss of income in addition to everything else. Three major aspects contribute to determining the value of human life: the individual’s age, his present, and future expenses, and his current and future income. Using this process, you can reduce your current insurance coverage to determine your additional coverage requirement.

How to determine HLV?

For instance, suppose an individual earns Rs 30,000 per month, and Rs 6,000 of that may be attributed directly to expenses. As a result, if that person dies, the family loses Rs 24,000 every month.

Assume the guy is 30 years old today and intends to retire at the age of 60. That means his dependents will lose Rs 24,000 per month in present value, adjusted for the expected increase over the next 30 years of his life till retirement.

Thus, examine the present value of a 30-year annuity with a payout of Rs 24,000 and a minimum return of 9%. This may appear to be a large sum, but calculate how much this individual would make 30 years from now by inflating Rs 24,000 at a rate of 6% every year for 30 years. As a result, he earns roughly Rs 60 lakh per year.

One of the key disadvantages of the HLV technique or index calculation is the inability to forecast future revenue levels. Estimates of future earnings are best made using nothing more than an estimate based on the individual’s current occupation’s earnings. These changes are expected as individual advances in their job and thus constitute a critical aspect in determining the value of one’s life.

Steps to calculate HLV

Step 1: Determine the earning member’s current income.

Step 2: Deduct his personal expenses, life insurance premium, and income tax.

Step 3: Calculate the remaining earning life of the breadwinner based on their current age.

Step 4: Calculate the discounting factor rate.

Step 5: Calculate the present value of the desired income stream using an inflation-adjusted rate of return.