Life is unpredictable. Though you may commit
yourself to planning each and every rupee of your financial life, you never
know what is round the corner. An unfortunate and unexpected event may lead to
a life cut short, a financial plan cut short and a family not only in an
emotional but also a financial turmoil. This is where life insurance comes in.
Purchasing a life insurance cover in any form (term, endowment, etc.) ensures
that your family is financially secure even when you are no longer there to
provide for them.
Importance of HLV
The key to ensuring your family’s financial
security lies in the quantum of insurance cover you wish to purchase. So, how
do you arrive at this magic figure? Well, by knowing your Human Life Value
(HLV). The HLV provides an indication of the insurance cover required to ensure
the financial security of your dependents after taking into account your life’s
existing and future financial situation.
Factors impacting your HLV
Factors such as your age, annual income, age
of retirement, goals, assets and liabilities, current and future expenses and
of course, the existing insurance cover, if any, are considered.
Annual
Income- Your average annual income is computed for a
given number of years, beginning from your present age to the age of
retirement, adjusting for increments. All expenses such as taxes, EMIs,
household expenses, etc. are deducted from the annual income.
Sources of Income other than
Salary- Over and above your salary, you may have
other sources of income such as rental income, investment income, dividend
income, pension received by your parent(s) if any, etc. All these are also
considered as annual cash inflows.
Inflation - If
you maintain the existing pattern of household expenses, the same will increase
year on year due to inflation.
Existing
Investment Portfolio - The present value of future
streams of income derived from current investments is taken into account after
adjusting for inflation.
Financial
Goals - All future goals too need to be accounted to
ensure its fulfilment even in your aftermath.
Time Period- The
corpus (i.e. the sum assured available from the insurance policy) needs to cover
the financial needs of your dependants for a specified period of time. Identify
this time frame and multiply all annual expenses with this figure to compute
total expenses.
Outstanding Loans -Existing
loans need to be repaid. Compute the present value of all outstandings – car
loan, home loan, personal loan, etc. This will ensure that your family does not
have to carry the additional burden of repayment of loans that may have been
taken by you.
Existing Life Insurance
Cover -You may have already purchased some insurance
cover. This value needs to be deducted from the recommended insurance cover
Computing your HLV
All the above factors, individually and
collectively lead to a suitable HLV figure… What formula should you use? Don’t
get into that, unless you really want to. These days, there are many HLV
calculators available on the internet. All you need to do is be ready with the
above information, fill it in and voila...your HLV figure is returned to you.
Remember, while an under insurance may lead to financial insecurity, an over
insurance may lead to a commitment of resources that could have been utilised
elsewhere.
