Introduction to life insurance 1

How much insurance to buy?
Concept of Human Life Value:
Beyond all doubt, your life is invaluable. Yet, there is a certain worth that can be attributed to the
financial support you offer your parents, spouse or children. This worth is referred to as Human Life
Value (HLV). In the future, if your family does not have the protective blanket of your presence, they
will no longer be able to enjoy the benefits of the income you earned. Put simply, Human Life Value is
the present value of your future earnings.
You should calculate your Human Life Value so you can accordingly invest in insurance plans that
provide your family with adequate finances and hence security even in your absence.
Your Human Life Value is determined by 3 factors:
1. Your age
2. Current and future expenses
3. Current and future income
As a thumb rule, if you are 30 years of age, you should insure yourself for an amount approximately 8
times your annual income. At 35, your investment should be close to 6 times your income. Of course,
the exact amount of your investment should be determined by the number of people who depend on
you, your existing investments and your life stage. For example, if you are 30 years of age and have
two children and parents to provide for, the amount you invest should be reflective of your
requirements.
The Human Life Value may be defined as the capitalized value of the net future earnings of an
individual after deducting appropriate costs for self maintenance. From the point of view of
dependents, an individuals Human life value represents the measure of the value of benefits they can
rightfully expect to get from their bread-winner. Likewise, form the standpoint of an organisation, the
human life value on one of its key employees is a measure of the value of his ore her services to the
organisation.
In 1924, S.S Huebner of Wharton School of Finance and Commerce, University of Pennsylvania,
U.S.A; suggested that the human life value concept is not just a statement that a human life has an
economic value but implies that the five aspects as follows:
 Appraisal and capitalization of human life value
 Recognition of family as an economic unit organized around human life values
 Human life value and its protection as the main link between present generation and the
succeeding generation
 Recognition of human life value as creator of property values
 Application of scientific principles of business management to life values
Capitalization of economic value of a human life is possible through life and health insurance. By
guaranteeing this capitalized value in the event of death, life insurance tries to perpetuate the earning
capacity of an individual life for the benefit of its dependents. With the bread winners death, the whole
value will be swept away. Life insurance acts as a hedge against such a loss. It is the only scientific
method of capitalizing the economic value of a human life and indemnifying for its loss in case of
premature death.
Thumb rule: Without going into the mathematical aspects, if person aged 40 earning Rs 20,000 per
month, i.e; Rs 2,40,000 per annum, dies leaving behind dependents in the form of his wife and
children; the annual economic loss to the dependents is the loss of his income i.e Rs 240000. However,
that will take care of the needs of the family for a couple of years only. What about the rest? Hence,
thumb rule of maximum 10 times the annual income to maintain the existing standard of living of
dependents, or say a minimum of 5 times the annual income to meet expenses; is used. E.g; if the
deceased had a life insurance cover 10 times his income, the sum assured payable to the nominee
would have been 24 lakhs. The logic is that, this 24 lakhs if deposited in a bank, would generate
interest @10% i.e Rs 2.4 lakhs, exactly the sum the deceased earned before death. That is why life
insurance is used to maintain the same standard of living in case of unfortunate death of the life
assured.
2. Life insurance helps to maintain standard of living of dependents in case of unfortunate
death/ permanent disability of life assured.
Friends: let me ask you a simple question.
Imagine you are sitting on a chair in your home/ office located at the 3rd floor of the building. You
are sitting very comfortably (1st level support) on the chair and reading the latest bestseller book.
Suddenly, the chair breaks down. Where do you land? Of course, on the floor.