How Much Life insurance you need: Human Life Value

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The biggest threat for anyone is death. Death always remind you about your family and then there is a chain of worries starting from how family will survives in your absence, child’s future and education, and so on…

Life Insurance is one of the biggest instruments to put these queries on backstage. But the important thing is you should be insured appropriately.

In a study it has been found that most of the people in India are under insured. Having an appropriate insurance is one of the most important parts of the financial planning.

While calculating insurance needs one also comes across rather technical term “Human Life Value”.

Human Life Value helps to figure out how much Insurance one needs to support his family in his absence.

In simple words Human Life Value is one’s expected future earning. Because of his unexpected departure his family will need approximately some amount to fulfill what he his dreamt for his family.

To find out your Insurance need there is simple steps by step procedure.

  1. Calculate outflows
    • Calculate annual income.

This is the amount that your family would require annually in your absence. You would need to consider day to day expenses considering inflation.

For e.g. you feel that 80,000 is the annual amount your family need considering 8% annual rate of interest, you may need to put

80,000 * 100 /8 = Rs. 10, 000, 00.

· Calculate your existing debt.

This is the amount that your family would need to pay your bills in your absence.

You need to consider your existing loans as well as your credit card debt and any other debt which you have.

Suppose your pending house loan is Rs. 9, 50,000 and credit card bill is Rs. 50,000 then your total debt is Rs. 10, 00,000.

· Calculate child’s education/marriage expense.

Depending on number of child you have you need to figure out an amount that would be required for fulfilling their education and marriage needs.

For e.g. you feel that Rs. 10, 00,000 is enough for your sons education as well as his marriage.

Now total outflow comes to 10, 00, 00 + 10, 00, 00 + 10, 00,000 which is Rs. 30, 00,000

2. Calculate Inflows/Assets.

· Calculate saving that you have in your bank account, your PF balance. Do not consider your house as your family would need a place to live (Until and unless you have 2 houses).

For e.g. A Rs. 5, 00,000 is your PF balance and Rs. 5, 00,000 is present in your bank account as FD.

Now total assets are of worth Rs. 10, 00,000.

Amount of insurance required or your “human Life Value” is

Human Life Value= Step 1 (Expenses + Debt) – Step2 (Property/Assets).

This means HLV= 30,00,000 – 10,00,00 which is Rs. 20,00,000

You need to have Life Insurance of Rs. 20,00,000 to support your family in case you die.

Depending on your fund availability and choice you can select between Endowment, Money Back, Whole Life, Term and Child insurance policies. But remember that it is always wise to divide your saving in various available saving instruments.

So is this enough?

No you need to re-calculate your insurance need at least once after every 2 years or after any type of change in your life style; it is also advisable to have at least 10 to 15 percentages more insurance cover.

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