Spend, Save and Invest Smartly
The concept of Human Life Value (HLV) is something that we all hear about (especially from the insurance agent) but hardly have we known to calculate. The reason being there is no definitive source of information on the subject. The fact that there is more than one methodology to calculate the HLV makes the subject even more challenging to understand. For the uninitiated, inflation eats away the value of money; a Rupee today is worth more than a Rupee tomorrow and so one need to suitably 'discount' future earnings to express the value in present Rupee terms. Our view on how HLV must be calculated is quite different from this. HLV in our view is the monetary value of all the yet-to-be fulfilled needs of the dependents plus all the outstanding liabilities. We define HLV in this manner (notice that we do not factor in earnings at all) because the simple reason is even though expected incomes may not be sufficient to meet the needs, the needs are still there. And an individual strives to meet the needs of his/her dependents. Therefore, the HLV thrown up by our definition is really a 'target' that you must have in mind; you can and possibly may have to plan for a lower HLV, but don't despair over that.
The vital thing is to set a goal for yourself so that your dependents are well taken care of, whether you are there for them or not. Beyond all doubt, your life is invaluable. Yet, there is a certain worth that can be attributed to the financial support you offer your parents, spouse or children. This worth is called as Human Life Value (HLV). In the future, if your family does not have the protective blanket of your presence, they will no longer be able to enjoy the benefits of the income you earned. To put into simple words simply, Human Life Value is the present value of your future earnings.
You must calculate your Human Life Value so you can accordingly invest in insurance plans that provide your family with adequate finances and hence security even in your absence. Your Human Life Value is determined by 3 factors :
As a thumb rule, if you are 30 years of age, you must insure yourself for an amount approximately 8 times your annual income. At 35, your investment must be close to 6 times your income. Of course, the exact amount of your investment must be determined by the number of people who depend on you, your existing investments and your life stage. For example, if you are 30 years of age and have two children and parents to provide for, the amount you invest must be reflective of your requirements.