What is Human Life Value ?
Yes. It’s a price tag on human life. Every humanbeing is priceless to his family. But it becomes necessary to evaluate a human life in terms of money, in order to safeguard from under-insurance problems. Under-insurance at times leaves no trace of insurance when it fails to serve the purpose for what it was effected. Insurance on Human Life should be sought keeping in mind, the financial loss that the family would suffer in his/her absense. Instead of buying Life insurance policies as a tool for reducing tax liability, provision for old age, to venture into stock markets on a small scale etc, it would make sense if insurance is sought from the angle of economic replacement of human life value.
Human Life Value concept was founded by Dr. Solomon S. Huebner, the founder of ‘The American College of Life Underwriters’, in the 1920’s. HLV concept is used by various professionals like Underwriters, Courts, etc. for determining the economic value for a Human Life. For the victims of the ‘Terrorist attack of September 11, 2001’ on the twin towers, courts decided the amount of settlement based on this concept.
HUMAN LIFE VALUE of a earning member in the family could be defined as the amount that the family would require to retain the same standard of living in the absence of the earning member. This would be the maximum amount for which a person can seek insurance protection.
Human Life Value based on Income:
The first step towards computation of Human life value would be to determine the net annual income of the person after deducting the amount spent by him for his personal use. This amount will be the amount that he affords to his family annually. Let us assume that the person is 40 years of age and his annual income after deducting all his personal expenses sums up to Rs.3,60,000. So, in order to get this amount annually in the absence of this earning member, his family would need Rs.45,00,000 on his demise (This assumption is based on investment of Rs.45,00,00 as fixed deposit @ rate of 8% interest per annum).
However, the erosion money value due to inflation was not taken into account in this method.
Human Life Value based on expenditure:
The more complex calculation of HLV is based on expenditure that the family has to meet out after the earning member’s life. The factors such as age of life expectency of spouse, number of children and their dependancy period on the family, monthly household expenditure, cost of inflation, outstanding loans etc., are to be taken into account in the calculation of this type of HLV.
Of course, the disposable assets if any the family posesses, value of the same could be deducted from the total amount that family needs. Say, if the earning member left behind an asset valued at Rs.20 lakhs the same could be deducted from Rs.45 lakhs of capital requirement of the family worked out. So, as per our illustration, the family would require Rs.25 lakhs in addtion to the disposable asseet valued at Rs.20 lakhs, to earn an amount of Rs.30,000/- per month.
Type of Insurance :
Now, the type of life Insurance product that you want to choose in order to get the coverage of Rs.25,00,000/-, is an important decision.
The following will be the premium amount that you have to pay annually under different Life Insurance products. Well known insurance products in the indian market are Term Insurance, Pure Endowment Plans, and ULIP (Unit Linked Insurance Plans).
Which plan would you choose to get your life covered for Rs.25 lakhs ? Term insurance products seem to be cheapter than ULIP, Endowment etc. Is it so? Check this previous GConnect article that compares Term Insurance and ULIP.
The bottom line is one should get his life covered for sum that would serve the purpose of fulfilling all the financial needs of the family in his absence. Taking an insurance cover for a small amount that would not serve the purpose is as bad as not taking any life cover.