Human Life Value(hlv)- How to calculate in Life Insurance?(Telugu)
Life Insurance a must thing to every earning person in the family to protect their dependants in case of their absence. Moreover, Life Insurance protects Life Insured Dependants financially in his absence. There are a few methods available to calculate the amount of life Insurance needed. 1. Human Life Value Method or Income Replacement Method.
Here, In this article, I will give an Excel template to Calculate Human Life Value(HLV) too.
Read this article about LIC vs Postal Life Insurance. Click here to read.
Need-Based Analysis or Expenses Replacement Method is another way to Calculate Life InsuranceRequirement. This method I will explain in another article.
Human Life Value or Income Replacement Method Calculation for Life Insurance I will explain in this article. This method simply called an HLV method also.
Human Life Value- What is this approach?
Some People in the family will earn and some members will not earn. The members who are not earning will be dependant on the members who are earning.
There will be a Financial Loss to the Non-Earning members of the family if the earning member dies.
Hence, to protect Non-Earning members(dependents) in the family, earning members of the family may take an insurance policy on their life so that the dependants will be financially secured in case of their sudden death of the earning member.
Human Life Value(HLV) Calculation will tell you, your economic value.
This calculation will tell you the total wealth that your family members will lose in your absence.
This calculation takes a few factors into consideration your age, retirement age, present income, gender, occupation, and your income growth rate etc.
This HLV method is completely opposite Need-based analysis or Expenses replacement method for Life Insurance.
Human Life Value Calculation- Breaking Down…
When using the human-life approach, it is necessary to replace all of the income that’s lost when an employed spouse dies. This figure includes after-tax pay and makes adjustments for expenses (like a 2nd car) incurred while earning that income. It also considers the value of health insurance in his/her name or other employee benefits.
Human-Life Value Calculation…
In this step present value of Future gross earning must be calculated. To calculate this you need following parameters.
Return expected from Death Received = R
Salary Growth rate expected = G
Number of years expected to work = N
Present Year Gross Salary = PMT
Real Rate of Return = I
Formula for Real rate of return Formula = (1+R)/(1+G)-1
This Real Rate of Return can be calculated
By using Return from death claim(R) and Salary Growth(G).
After this by entering the values in the below formula in excel, we get Present value of future earnings of your income.
In this step, Present value future taxes and self-living expenses of you must be calculated. For this calculation few parameters required.
Real Rate of Return = (1+r)/(1+g) – 1
Here r- means return expected from death claim received and g- means growth rate expected of taxes and self expenses.
Number of years expected to work = N
Present year Taxes and expenses = PMT
Present Value of Future taxes and self expenses can be calculated by entering the values in the same formula we used in excel earlier in the 1st step.
Subtract the Value arrived in step 2) from the value in step 1), you will get your economic value today.
This value is Called Human Life Value, and The calculation method is called Human Life Value or Income Replacement Method for taking Life insurance.
Human-Life Value Calculation Example
A single mother, aged 33, earns Rs. 7.5 lakh p.a. out of which taxes and self-expenses account for Rs. 1.5 lakh p.a, and her salary is expected to rise 10% p.a.
Whereas taxes and personal expenses are likely to rise by 6% p.a, and she expects to work till 58 years, what economic value can you enumerate on her life, if she is confident of getting a return of 9% p.a. from investments?
Current gross earnings 750,000 Rs.
The rate of increment of gross earnings 10% p.a.
Current taxes and expenses 150,000 Rs.
rate of increment of taxes and expenses 6% p.a.
The rate of return from investing 9% p.a.
Current age 33 years
Expected earnings potential upto 58 years
PV of gross earnings, discounted at growth rate 20,967,027 Rs. PV((1+9%)/(1+10%)-1,58-33,-750000,0,1)
PV of taxes/expenses, discounted at growth rate 2,737,432 Rs. PV((1+9%)/(1+6%)-1,58-33,-150000,0,1)
PV of net earnings 18,229,596 Rs. 20967027-2737432
This example is taken from http://www.fpsbindia.org/Upload/CFPSampleQPaper/Solution1to4-RAIP.pdf
Download Human Life Value Excel Template using the link. Click here to Download the Calculator.
Read Other Article about Life Insurance Death- How to invest it? (Telugu). Click here to read.
Also read about NPS new tax benefits. Click here to read.