HUMAN LIFE VALUE - WHY THIS IS IMPORTANT TO CONSIDER BEFORE YOU PURCHASE LIFE INSURANCE

There are a few typical mistakes that people make while buying life insurance. People can make better decisions and steer clear of potential pitfalls by being aware of these serious mistakes. When buying life insurance, neglecting to calculate the human life value (HLV) might be a serious error. HLV calculation assists people in figuring out how much life insurance to buy in order to safeguard the financial security of their dependents in the case of their passing away.

 Human life value can be calculated using the human life value (HLV) technique, which takes into account their income, expenses, and future commitments. It is essential in figuring out how much life insurance is necessary to safeguard the dependents' financial security in the case of the policyholder's passing. In insurance, your age, income, future demands for money, and liabilities are all taken into account when calculating your Human Life Value. For example if you intend to work for an additional 20 years and earn Rs.5,00,000 per year, for instance, your Human Life Value may be Rs.1,00,00,000 (20 years x 5,00,000).

 Here's why ignoring HLV calculation can be a costly mistake:

 Inadequate Coverage: One of the primary purposes of life insurance is to replace the income of the insured individual in the event of their death. HLV calculation helps determine the amount of coverage needed to replace the income that the individual would have earned over their working years. In the absence of an HLV calculation, people can understate the amount of coverage they actually require, leaving their dependents insufficiently protected. Their loved ones can become financially vulnerable as a result and be unable to cover ongoing needs like a mortgage, schooling, and daily living expenses.

 Overpaying for Coverage: On the other hand, if people decide to buy more insurance than they really need, they will end up paying more than is necessary. Paying too much for insurance can put a strain on your finances and take money away from other financial objectives like investments and savings. Based on the HLV computation, one must accept the insurance coverage they genuinely need.

 Covering Debts and Expenses: Life insurance policies can also be used to pay off debts that have not been paid off, including credit card obligations, mortgages, loans, and burial costs. These monetary commitments are taken into consideration during the HLV calculation to make sure there is adequate coverage to settle them without placing a financial strain on the remaining family members.

 Future Financial requirements and Goals: The HLV computation takes into account future financial requirements and goals, such as keeping up the family's standard of living, saving for retirement, and paying for children's education. The right level of life insurance coverage can be chosen by projecting these future costs, ensuring that these objectives can still be met even in the event that the insured person's income is lost.

Inflation and projected Investment Returns: To guarantee that the life insurance coverage amount stays adequate over time, the HLV calculation takes into consideration variables like inflation and projected investment returns. The coverage amount can be modified to retain its purchasing power and keep up with the growing cost of living by accounting for these factors.

 Providing Financial Security: The dependents of the insured individual receive financial security and peace of mind from life insurance coverage based on the HLV calculation. It guarantees them sufficient protection and the ability to continue living at their current level even in the event of the insured person's passing.

 How to calculate human life value manually : Calculating human life value manually involves estimating the economic value of an individual's life based on various factors such as their age, income, future earning potential, expenses, and other financial considerations. Here's a simplified approach to calculating human life value: --

Determine the individual's current annual income. This can include salary, bonuses, investment income, etc., in addition estimate the individual's potential future income growth based on factors like career progression, inflation, and market trends. Estimate the number of years the individual is expected to work until retirement. Multiply their annual income by the number of working years to calculate the total income over their career. From the arrived amount deduct taxes and living expenses from the total income to account for what the individual would actually retain. Consider additional financial factors such as debts, savings, investments, and future financial obligations like education expenses for children or retirement savings. Since future income is worth less in today's terms due to inflation and the time value of money, discount the future earnings to present value using an appropriate discount rate. Sum up the present value of future earnings, adjusted for taxes, expenses, and other financial considerations. This represents the estimated economic value of the individual's life.

It is important to remember that determining the value of a human life is a complex process that requires many assumptions and approximations. Depending on the unique circumstances, inclinations, and preferences of individuals or financial professionals, many approaches and considerations may be applied. In the context of insurance planning, human life value computations are also frequently utilized to establish the right coverage amounts for life insurance plans.

 

Dr. Sanjay Mittal

PhD (Business Administration)

Senior Banker

 8146624667

Shsanjay.mittal@gmail.com