Calculate your Human Life Value
Don't randomly settle on a payout for your life insurance policy, as being inadequately covered is dangerous. Find out how much insurance you need with these simple steps.
Inadequate insurance is almost as good as no insurance. The aim of buying a life insurance policy is to provide for dependents in the unfortunate event of death. However, most people decide their insurance cover based on the amount of tax benefit they would get. The few who buy insurance to actually insure their dependents make a rough estimate of how much they would need; they too run the risk of inadequate insurance. To figure out exactly how much cover you need, you first need to calculate your Human Life Value or HLV.
HLV, simply put, is the income you would earn if you continued to work until your retirement age. Therefore, if you’re 30 years old with an annual income of Rs5 lakh and can work till you’re 60, then your approximate HLV is Rs15 crore. This is just an example to explain what HLV is. But keep in mind, HLV is neither a reflection of actual income nor the amount of cover you should have. It is simply a tool to show you exactly how costly your untimely death can be for your family.
To arrive at a fairly realistic HLV you must take into account expenses for important events that you can foresee in the future such as your marriage, the birth of children, their education and marriage and other such factors. You must also include expenses due to unforeseen events such as illnesses or accidents. Here’s how you do it:
Step 1: Calculate your Net Income
The first basic step is to calculate your total income from all sources such as salary and investments. You then deduct all your liabilities such as a home loan EMI from it to come to the net income figure.
Step 2: Calculate time-period to provide for your dependents
This step is crucial and depends largely on how old you are and how many dependents you have. If you are married, the period should ideally cover your spouse’s lifetime. It is hard to predict a person’s lifetime with certainty so assumptions can be tricky.
Step 3: Note down the important events in your dependents’ life
This would normally relate to your children, their education and marriage. It is relatively easier to estimate when they would finish their education and start earning. You don’t have to provide for them after they cross these milestones.
Step 4: Calculate your present household expenses
Calculate your present household expenses and deduct your share from it. For example if your monthly household expenses total to Rs50,000 of which Rs10,000 is spent on you (mobile bills, petrol, food, etc) then effectively you need to account for Rs40,000 every month or Rs4,80,000 a year. Bear in mind that once your children start working not only would you no longer need to provide for them, but your household expenses would reduce too.
Step 5: Take into consideration unforeseen expenses
Your dependents may incur expenses due to unforeseen illnesses or accidents. You can either factor in such events while computing your HLV or go for separate insurance schemes – for example, medical insurance or fire insurance. In case you opt for other insurance schemes, their premiums need to be taken into account.
Step 6: Remember to factor in inflation
Most people do not factor in inflation. Inflation erodes the value of money and if you haven’t taken it into account you will end up with an inadequate cover.
If you have followed the above steps, you would arrive at a fairly realistic amount that you would need to provide for. However, your HLV will change as your lifestyle changes and therefore you must recalculate the amount every few years, particularly after major life events such as marriage, the birth of children and promotions, to ensure your dependents are sufficiently covered.
“Underinsurance” is a chronic problem in India. Inadequate insurance can leave your dependents in dire straits in the event of your untimely death. If you want to ensure their financial stability and security, it is important that you get adequate insurance based on your HLV.