How Much Life Insurance Cover You Need?

By: Srikant Tapadiya

For many it may be a surprise question as to them Insurance is an Insurance. There are very few people in India understands the concept of “Human Life Value” which need to be calculated before buying any insurance policy and it is not their fault.

It is observed that, when someone thinks of an insurance policy, he/she approaches any of his/her known person and end up buying a policy which may not be suitable to him/her. 
The reason for this mess up is, in India even the Insurance Advisor, most of the times, act as an Agent and sell something to their clients where there is a vested interest of the Agent.

So, the question remains unanswered – How Much Life Insurance Cover You Need!?!

The answer to this very basic question is by evaluating your Human Life Value

Human Life Value (HLV):

Human Life Value can be defined, in simple terms, as the Economic Value you bring into your family’s finance. In other words, it is your future obligations towards your dependents which you need to make it to current value.

Case Study to understand HLV:

Mr. X is 30 yrs old and his wife Mrs. X is 25 yrs old. They have one child of 3 years age. Both Mrs X and the Child are dependent on Mr X income. The life expectancy of Mrs X is 70 Years. Mrs X is completely dependent on Mr X as she is not working. So she is dependent on him for the next 45 years. The child is dependent on his father only until he starts earning, approximately 25 years from now.

The common and guaranteed expenses of Mr X would be:

- Household expenses at present is Rs.25,000/- per month (Excluding Mr.X’s personal expenses and his Tax Liability)

- The Child education and marriage would cost Mr X totally Rs. 25,00,000/- as per their present living conditions.

Now, in above case we need to calculate each value in today’s term till the life expectancy of Mrs X. Once we come to that figure, it would become the Human Life Value of Mr X.

- In the absence of Mr X, the family need around Rs.91,00,000/-  aprox to sustain household expenses till Mrs.X’s life span. We have considered inflation at 6% and we assume that Mrs X would generate 8% returns on the investment of Rs. 91 Lakhs she receives after the demise of Mr X.

- Child’s expenses assumed in today’s value. Hence, we need to consider that too for considering Human Life Value.

Hence, the Human Life Value of Mr X would be Rs. 1.16 Crores (Rs. 91 Lakhs for Household Expenses and Rs. 25 Lakhs for Child Education and Marriage).

In simple words, if something unfortunate happens to Mr X, his family (dependents) would require Rs. 1.16 Crore to lead the life without any financial compromise.

Finally, Mr X should get a Life Insurance Cover of atleast Rs. 1.16 Crores.

Please note that, in this case study we have not considered medical expenses, lifestyle expenses, etc to keep the discussion simpler.

Human Life Value changes periodically if there are any changes in the personal life. Hence, it is advisable to relook into this parameter atleast once in 3 or 5 years. One thing is certain, HLV can not go down (excepation: dependents become independent, which is rare case) but will surely increases for any individual as life moves.

Now deciding factor is, which Insurance 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).

Life is beautiful when the breadwinner of the family is alive and equally painful when he suddenly disappears from the world. So…….Plan well

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