Have you ever calculated how much Life Insurance you need? I know lot of us never thought about this. Even though you currently have Life Insurance of XYZ company, but you never calculated whether it is enough or not? It is common practice in India to approach Insurance Agent without validating his qualification and authenticity. This makes him to force on you his selected product and he may never calculate “Human Life Value”. He may mix up your Insurance need with your investments need and will show you some illustrations which may be rosy in today’s term but what about future? Basic thing you must understand is, never mix your Insurance with Investment. So how we have to calculate “Human Life Value”? I will show with simple illustration.
Human Life Value in simple term you can define as “your future obligations towards your dependent which you need to make it to current value” for example Mr.X’s age is 30 yrs and his wife Mrs.X’s is 25 yrs and her life expectancy is around 70 years. I will try to illustrate with simple 3 common expenses of his life span.
1) Mr.X’s Household expenses in today’s term-25,000 PM (Excluding Mr.X’s personal expenses and his Tax Liability)
2) Mr.X have Home Loan of about Rs.50,00,000 (Current Value)
3) Both have a child whose age is around 5 yrs and they need around Rs.15,00,000 in current terms for their child’s future education and marriage expenses
Then in above case we need to calculate each value in today’s term till the life expectancy of Mrs.X’s life span (It is assumed that Mrs.X is financially dependent on Mr.X for her whole life).
Then the above-mentioned 3 expenses should be calculated to find Human Life Value as below.
1) They need around Rs.91,00,000 aprox to sustain household expenses till Mrs.X’s life span considering inflation as 6% and return on investment around 8%. Means, with that Rs.91,00,000 she can lead her life till 70 yrs of her age with expenses being Rs.25,000 PM which is going to increase 6% (Inflation) for each year . She needs to invest Rs.91,00,000 where she will generate around 8%
2) In the event of his sudden death, then the existing Home Loan need to be payable from the insurance amount. Hence, we need to consider that value to in calculating his human life value.
3) Child’s expenses also take in today’s value. Hence, we need to consider that too for considering Human Life Value
In all, after adding above three values his requirement of cash in the event of his untimely death towards his family is around Rs.1,56,00,000. Hence he need around Rs.156,00,000 Insurance Cover for his Life. Which again need to be increased in line with Inflation on yearly basis or at least either for after each 3 or 5 yrs.
Now deciding factor is, which 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).
Decide and cover your life risk, which is precious when you think about your dependents. Hope now you understood the value of “Insurance” and “Human Life Value”.