Insurance and HLV!

Make provision for important events in your dependents’ lives. Your dependents will experience certain important life events, and you have to provide for these events. E.g. illness of the dependents, children’s education and marriage. Also once your children leave home or start working, then your household expenses will reduce. So from then on, you just have to think about your spouse.

Satish was married with a wife who was a homemaker and a 2 year old son. He bought a life cover of Rs. 5lakhs. But one day, Satish met with an accident and passed away on the spot. His wife got the sum assured from the insurance cover. However the claim amount she got was very less. She found it difficult to meet her household expenses after the untimely demise of her husband, as the compensation she received was not enough to meet her regular household expenses. Why did it happen? The reason: HLV was not taken into account when determining the life cover for Satish.

Here we cover what is HLV, its importance and the steps to determine the actual HLV. 

What is HLV?

HLV or Human Life Value is the probable income of the insured person, or the total income the person is likely to earn during the remaining part of working life. E.g. A person aged 24 will work till 60 years of age. If he is expected to earn Rs. 90 lakhs throughout his life, then his HLV is Rs. 90 lakhs. This is not the actual income but rather the target that you should try to achieve in order to live a secure life and to take care of your dependents should you die in unfortunate incidence.

Importance of HLV

We all want our dependents to remain safe and well provided for in case of our death. This can be achieved by buying the appropriate insurance cover. To get the correct insurance cover, you must compute the HLV. Unfortunately most people tend to ignore this important calculator.

Steps to calculate HLV

Are you wondering how to calculate HLV? Then here are 6 simple steps to help you achieve that goal.

– Calculate the period over which you intend to provide for your dependants. If you are married, the period should include the remaining lifetime of your spouse. To do this you have to assume how long you expect your spouse to live. Then subtract your spouse’s age from this expected lifespan. E.g. if your spouse is 35 and you expect your spouse to live for 100 years, then you will be required to provide for next 65 years.

– Make provision for important events in your dependents’ lives. Your dependents will experience certain important life events, and you have to provide for these events. E.g. illness of the dependents, children’s education and marriage. Also once your children leave home or start working, then your household expenses will reduce. So from then on, you just have to think about your spouse.

– Calculate your present household expenses. Find out what are your present monthly expenses and from that deduct the amount you spend on yourself. E.g. if your monthly household expenses is Rs. 30,000 and you spend Rs. 10,000 on yourself. In case of your death, your dependent’s monthly household expenses is Rs. 20,000 (Rs. 30,000 – Rs. 10,000) or Rs. 2,40,000 per year.  So you should provide for this sum after taking into account the inflation.

– Calculate the effect of inflation on expenses. This is essential to compute the future household expenses. This is important step in the process of computing HLV. Inflation can erode the value of money. So if you have not considered inflation, the provision you make for your family will lose its worth. Hence for longer periods, you have to take into account the effect of inflation on the expenses.

– Find out the current value of your expenses. This is the next step in calculating HLV. A rupee spent in future is worth less than the rupee spent today. This happens due to inflation. E.g. Rs. 1000 today will be worth less in 5 years from now. So you have to calculate the value of your future expenses in current monetary terms. It will give you an estimate of the amount you should put aside for your dependents.

– Take into account the current value of current liabilities and medical expenses. If you have any unpaid loans and/or medical expenses should be considered while calculating HLV. This is because in case of your untimely death, your dependents will have to pay off.

Once you complete all the above steps, you have reached the correct HLV. But remember, computing HLV is not a one-time affair. It is a continuous process as you move through life. Any change in your lifestyle will mean fluctuation in the expenses. Also you are assuming certain things like rate of inflation, how long you expect your spouse to survive etc. These will affect your HLV and so it is advisable to calculate it each year to ensure your dependents are sufficiently provided for in case of your death.