HLV – Key to an optimum insurance cover

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.