Introduction
A popular advertisement in media which most of us must have seen says "There are some things that money can't buy, but for everything else there is MasterCard." Ask people in which category does human life belong and without a second thought they will agree that human life is priceless and no amount of money can compensate for the value of a human being. But insurance companies will differ to this thoughts. To arrive at the amount of insurance cover that a person should take they assign a monetary value to human life which they term it as Human Life Value (HLV). Through Human Life Value (HLV) we try to measure the economic value of a person. A person has different values like emotional value, social value, spiritual value, economic value etc. Human life value measures how much the person is worth in monetary terms. So what exactly is HLV?
Concept of Human Life Value
Like any other asset (real estate, equities, commodities etc) human beings are also assets and have potential to generate income. When any asset is put up for sale, the value of the asset is determined based on factors like present condition of the asset, remaining life of the asset, future income generation potential, other features of the asset etc. In a similar way if a person were to be put up for sale, his/her value will also be determined on the above mentioned factors.
Let us see how the above factors affect the value of human life
Present condition of the Asset: If the human being is not fit and fine or if the person is totally disabled/handicapped he will definitely not command significant value.
Remaining life of the Asset: If the average life expectancy of a person is 80 years and the person whom we are evaluating is 75 years old, then again he will not command significant value.
Future Income Generation Potential: If the person is young and earning well and is in a sunrise industry with very good future prospects, then he certainly will command premium valuation as compared to other people.
So taking into consideration the above 3 factors and other factors, the value so arrived at is termed human life value. In insurance parlance this human life value is used as a yardstick to determine how much amount of life insurance cover a person should have. This is done so that if the person dies today, there shouldn't be any economic loss. Off course emotional loss cannot be compensated for. If the person dies today, the lump sum amount that the person's family will get from the insurance company should compensate for the future income of the life insured, which he/she would have earned had he/she survived.
How much Life Insurance should one have?
Ask people how much life insurance they should have so that if they are not around, the family should not suffer and immediately comes the reply saying "I have lot of life insurance policies. I have taken adequate cover to take care of my family in my absence." What lot of people don't realise is that in spite of having multiple insurance policies, due to the small cover amount of individual policies, they are grossly underinsured. So then what is the correct amount of life insurance cover that a person should have?
So let us have a look at different ways of arriving at human life value (HLV). The amount of life insurance cover that a person should have should be equal to his/her HLV.
Income Replacement Method
This method takes into consideration the future income earning potential of a person during the remaining years of his working lifespan so that in case of untimely death the family doesn't suffer financial loss.
There is a 2 step process to calculate HLV through this method.
Step 1: The first step is to calculate the total future income the person will be able to earn during his remaining working years.
Step 2: Then the second step is to calculate the present value of this amount (arrived at in step 1) as on today. This is the person's human life value. The life insurance cover that the person should take should be equal to this HLV figure. In case untimely death happens, this method captures the future income potential of the person, which he/she would have earned had he/she survived till retirement. In one sentence as per this method simply put, Human Life Value is the present value of your future earnings.
Example
Let us take an example. Rajesh is a 35 year old person earning Rs 4 lacs per annum. Rajesh's family consists of his wife (housewife), 4 year old daughter who has just started going to school and retired parents dependent on Rajesh.
Rajesh's taxes and personal expenses amount to Rs 8,000 per month. The net contribution made by Rajesh to the family is Rs 25,000 per month (Rs 3 Lacs p.a.)Rajesh has 25 years of working life span till retirement (60 years).
If we assume that Rajesh's salary will increase by 5% every year and his family contribution (Rs 3 Lacs) also increases by 5% every year, then by the time Rajesh retires at age of 60 years his total contribution to the family will be Rs 1,43,18,129 (approx Rs 1.43 crores) during his entire working life.
So Rajesh's worth for his family is Rs 1.43 crore over his remaining working life span.
But if something happens to Rajesh today, his family stands to lose this money which Rajesh would have earned if he would have survived till 60 years. So this Rs 1.43 crore is Rajesh's future earning potential which he should protect.
But we need to find the value of this Rs 1.43 crore as on today. So if we take the discount rate as 8% (Risk free PPF rate). Then the value of Rs 1.43 crore as on today comes to Rs 20,90,703 (Rs 20.90 Lakhs). This effectively means that one time amount of Rs 20.90 Lacs invested at 8% interest rate for 25 years will yield Rs 1.43 crore on maturity.
So this Rs 20.90 Lakhs is Rajesh's human life value (HLV). Rajesh should take life insurance cover of Rs 20.90 Lakhs to protect his future income.
The below table explains the calculation of human life value for Rajesh
| Annual Income | Rs 4,00,000 p.a. |
| Expected Hike in Salary | 5% p.a. |
| Net Income after Taxes and Personal Expenses | Rs 3,00,000 p.a. |
| Current Age | 35 Years |
| Remaining Working Years | 25 Years |
| Future Value of Earning Potential | Rs 1,43,18,1,43,18,129 |
| Discount Rate (PPF Rate) | 8% |
| Present Value of Future Earning Potential | Rs 20,90,703 |
Simpler Method
If the above method seems little complicated to understand, there is a simpler method to calculate HLV using the income replacement method.
Let us take the same example of Rajesh again which we saw above. Rajesh's annual income is Rs 4 Lacs (approx Rs 33,000 a month). After paying taxes and his personal expenses Rajesh contributes Rs 3 Lacs p.a. (Rs 25,000 a month) to his family. So if Rajesh is not there his family will suffer a loss of Rs 3 Lacs a year. Let us assume that the current Bank FD rates in the market are 8%. So if a person invests Rs 37,50,000 (Rs 37.5 Lacs) in a Bank FD at 8% p.a. interest rate, the yearly interest earned will be Rs 3,00,000 (3 Lacs). So Rajesh's HLV is Rs 37.5 Lacs and he should take life insurance of Rs 37.5 Lacs, so that in case of untimely death Rajesh's family will get Rs 37.5 Lacs which if they invest in a Bank FD at 8% interest rate, will give them Rs 3,00,000 yearly income. This Rs 3 Lacs p.a. will substitute Rajesh's yearly contribution of Rs 3 Lacs p.a. and take care of the family's expenses in Rajesh's absence.
The below table explains the calculation of Human Life Value for Rajesh
| Annual Income | Rs 4,00,000 p.a. |
| Taxes & Personal Expenses | Rs 8,000 per month |
| Net Monthly Contribution to Family | Rs 25,000 per month |
| Net Annual Contribution to Family | Rs 3,00,000 p.a. |
| Bank FD Rate | 8% |
| Human Life Value Calculation | 3,00,000 / 8% = 3,00,000 / 0.08 = 37,50,000 |
| Insurance Amount Required (HLV) | Rs 37,50,000 |
| Rs 37,50,000 invested in Bank FD at 8% interest rate will give annual return of 37,50,000 * 0.08 = Rs 3 Lacs per annum | |
This method will ensure that the family will constantly keep getting Rs 3 Lacs per annum as long as Bank FD rates stay at 8%. Also this method assumes that the salary will remain constant at Rs 4,00,000 p.a. throughout. This method does not take into consideration the hikes in salary going forward. This method also assumes that Bank FD rates will remain constant at 8% throughout and does not take into consideration the increase or decrease in interest rates.
Human Life Value is not a one time calculation. It is an ongoing process which needs to be revisited from time to time. As age increases human life value diminishes.
Conclusion
Even though it is difficult for people to digest that they need to put a price tag/value on their life, the reality is that to buy insurance you have to put a price to your life to know your human life value. If a person still feels that he/she is priceless and hence can't put a value to their life, then we believe the person is living in fool's paradise. If a person's argument for not buying life insurance is that he/she cant put a price tag to their life, then we believe that person is worthless because once the person is gone (dies) his/her income earning capacity is also gone with them. So we suggest calculate your human life value today and buy life insurance, if not for yourself then atleast for the well being of your family. It is best to go for a term insurance policy because it can give you a higher amount life cover and at the same time it is light on the pocket. Term insurance policies are the cheapest insurance policies available in the market.
The following table explains Rajesh's contribution to the family income over a period of 25 Years
| Year | Annual Contribution to Family | Annual Increment (5%) | Amount at the end of the Year | Total of all Years |
| Year 1 | 300000 | 0 | 300000 | 300000 |
| Year 4 | 330750 | 16537 | 347287 | 1293037 |
| Year 8 | 402028 | 20101 | 422130 | 2864732 |
| Year 12 | 488668 | 24433 | 513101 | 4775137 |
| Year 16 | 593979 | 29698 | 623678 | 7097247 |
| Year 20 | 721985 | 36099 | 758085 | 9919786 |
| Year 24 | 877578 | 43878 | 921457 | 13350599 |
| Year 25 | 921457 | 46072 | 967529 | 14318129 |
| Total Contribution in 25 Years |
| 1,43,18,129 | ||
| Present Value as on Today |
| Rs. 20,90,703 | ||
