What is Human Life Value (HLV) and How It Is Calculated?

Deciding the right life insurance amount can be overwhelming without a complete and 360-degree understanding of how insurance value is calculated. Thankfully, we're here to help!

Many people often underestimate their coverage needs, either choosing too little or opting for arbitrary figures. This is where Human Life Value (HLV) comes in. HLV provides a structured, responsibility-based framework that calculates the exact amount of insurance you need based on your income, liabilities, and your family's financial needs. In this article, we'll explore what human life value in insurance is, why it's essential for accurate life insurance coverage, and how to calculate human life value for optimal financial protection.

What Is Human Life Value in Insurance?

Human Life Value is the economic value of a person's future income contribution to their dependents. It represents the amount of money needed to replace an individual's lost income if they were no longer around to provide for their family.

HLV is a responsibility-based concept, and it ensures that dependents can maintain their standard of living, cover daily expenses, and meet long-term goals. By considering future earnings and obligations, HLV serves as a crucial tool in determining the appropriate life insurance coverage required to protect your loved ones financially.

Why Is Human Life Value Important in Financial Planning?

HLV plays a vital role in financial planning by helping individuals accurately assess their life insurance needs. It ensures that family finances are protected by replacing lost income and providing for dependents in the event of an untimely death. For salaried individuals, HLV includes the income needed to maintain their family's lifestyle. For self-employed professionals and business owners, HLV also considers business income, liabilities, and future growth.

By factoring in personal expenses, future goals, and liabilities, HLV provides a realistic and structured estimate of life insurance coverage. This helps avoid both underinsurance and over-insurance and makes sure the right amount of protection is in place. However, we must note that over-insurance is very rare, since regulatory guidelines ensure that the sum assured does not significantly exceed a person's HLV.

Whether you're an employee, entrepreneur, businessman, or freelancer, understanding HLV ensures that your family's financial future is secured, even in your absence.

How is the Human Life Value Used in Life Insurance?

Unlike arbitrary cover amounts, which can lead to gaps in coverage, HLV ensures that your insurance is aligned with your actual financial needs. Ignoring it can result in underinsurance. Here's how HLV supports adequate coverage:

• Provides a structured estimate for your premium in life insurance based on future income and responsibilities.
• Reduces the risk of underinsurance by accurately calculating coverage needs.
• Ensures financial protection for dependents, covers daily expenses, and protects future goals.

How Is Human Life Value Calculated?

The Human Life Value formula involves assessing several key factors. The aim is to estimate how much money your family needs to replace your income and maintain their standard of living if you were no longer around. The calculation is typically done using the following steps:

Key Factors in HLV Calculation

• Annual Income: Your total income from salary, business, or other sources
• Personal Expenses: The amount you spend annually on living costs
• Liabilities: Any debts or financial obligations (e.g., loans, mortgages)
• Goals: Long-term financial objectives, such as children's education, wedding expenses, and retirement savings
• Time Horizon: The number of years until your expected retirement

Common Calculation Methods

1. Income Replacement Approach: Calculates HLV based on future income and the number of years you expect to work.
2. Needs Approach: Considers the financial needs of your dependents, including their future goals and liabilities.

Illustration of Calculation

Let's say:

• Annual income: ₹10,00,000
• Personal expenses: ₹3,00,000
• Liabilities: ₹5,00,000 (e.g., home loan)
• Future Goals: ₹10,00,000 (e.g., weddings, education)
• Remaining working years: 25

Using the Income Replacement Approach

• Net income for family: ₹10,00,000 - ₹3,00,000 = ₹7,00,000
• HLV = Net Annual Income x Working Years Left + Liabilities + Future Goals

HLV = (₹7,00,000 × 25) + ₹5,00,000 + 10,00,000

= ₹1,90,00,000 (before adjusting for inflation or other factors)

Note: This is an illustrative example, and the figures are for exposition only. Professional HLV calculations often use a discount rate to determine the Present Value of future earnings and account for inflation.

Conclusion

HLV in insurance is an essential instrument for realistic life cover planning. It offers a structured approach to determining the right amount of insurance. By considering your financial aspects, it helps ensure that your family is financially secure in your absence. It also removes the guesswork from life insurance and provides a clear coverage estimate.

At Bandhan Life, we understand the importance of tailored financial protection. Explore our life insurance plans today and calculate your HLV to ensure that your loved ones are secure.

Frequently Asked Questions (FAQs)

1. Is Human Life Value the same for everyone?

No, Human Life Value (HLV) varies for everyone based on factors like income, personal expenses, liabilities, and dependents. It's a personalised estimate tailored to your financial situation.

2. How often should HLV be recalculated?

HLV should be recalculated regularly, especially after significant life events such as salary changes, marriage, childbirth, or taking on new debts, to ensure your coverage remains accurate.

3. How does inflation affect HLV calculation?

Inflation impacts HLV by decreasing the purchasing power of future income. To account for this, inflation is considered during the calculation to ensure sufficient coverage for future expenses.