Human Life Value

Human Life Value

How much life insurance is recommended for you? In India, it is customary to approach an insurance advisor who may steer you towards his preferred policy while possibly never calculating the "Human Life Value." He might conflate your need for insurance with that for investments, and he might give you some examples that look good in the short term but not in the long run. The most important thing to realize is to never combine investments and insurance. How can we determine "Human Life Value" then? An easy example will be used to demonstrate this.

  • Mr. X’s Household expenses at today’s prices is 30,000 PM (Excluding Mr. X’s personal expenses and his Tax Liability)
  • Mr. X have Home Loan of about Rs.60,00,000 (Current Value)
  • Both have a child whose age is around 5 years and they need around Rs.20,00,000 in current terms for their child’s future education and marriage expenses

Then in above case we need to calculate each value in today’s term till the life expectancy of Mrs. X’s life span (It is assumed that Mrs. X is financially dependent on Mr. X for her whole life).

THEN THE ABOVE-MENTIONED 3 EXPENSES SHOULD BE CALCULATED TO FIND HUMAN LIFE VALUE AS BELOW.

  1. To maintain living expenditures until Mrs. X's death, they will need about Rs.2,58,45,710 assuming inflation will be 6% and an investment return of about 8%. With that amount of money, she could live until she was 70 years old while spending only Rs.30,000 a month, which would rise by 6% annually due to inflation. She must invest Rs.2,58,45,710 from which she will earn about 8%. 
  2. In the event of his sudden death, then the existing Home Loan needs to be repaid from the insurance amount. Hence, we need to consider that value too while calculating his human life value.
  3. Child’s expenses are also taken in today’s value. Hence, we need to consider that too for considering Human Life Value

The total amount needed for his family in the event of his untimely death after adding these three figures is around Rs.4,33,33,000. He therefore needs around Rs.4,33,33,000 in life insurance. It must again be adjusted yearly to account for inflation or periodically evaluated every three or five years.

Now deciding factor is, which Plan will cover this much Life Risk for you. Endowment Plans (You need to pay high premium to cover this much Life Risk with return being low), ULIPs (Expensive in terms of cost and Premium) and Term Plans (Pure Life Risk Cover Plans which are nowadays available in very competitive price).

Decide and cover your life risk, which is precious when you think about your dependents. Hope now you understood the value of “INSURANCE” and “HUMAN LIFE VALUE”.

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