Spend, Save and Invest Smartly
Like every material object, human life also has an “economic value”. It varies from person to person depends on their individual profile. But, in India most of us have not realized or calculated our own value. Human life value is becoming more and more familiar to us with the rapid growth of insurance sector. As the competition in the insurance industry is very high, the insurance companies are using Human Life Value as one of the marketing tool.
Human life value is the capitalized value of the net earning of an individual for the rest of his/her working span. In short, Human Life Value is the present value of the total income of the individual, which is lost to the family in the event of his untimely death.
Let us take an example, Mr. A aged 30, earning a gross income of Rs. 300000 today, will retire at the age of 60. Out of his monthly salary of Rs.25000, he uses Rs.5000 p.m for income tax and personal expenses. So, his per month salary is 20000 and annual salary is 240000. Assuming a 10% growth in his income each year, he would have a net earning of Rs.1, 76, 40,000 in the next 30 years till his retirement. The present value of this net earning discounted @8% is Rs.44, 54,884. If he doesn’t return home today, his family will lose this amount forever. Therefore Mr. A’s human life value is Rs. 44, 54,884.
Suppose, an individual earns Rs.20000 pm, his personal expenses are Rs.5000. The income he provides for his family is 15000 pm, and the annual income is Rs.180000.
What is the amount his family should deposit in a bank to earn an interest of Rs.180000, if he is not there to earn it for them?
If the family deposits Rs.22, 25,000 in a bank, they would get Rs.180000 p.a. at 8% interest. Therefore the present human life value of the person is 22, 50,000.
Please note, however that I have not taken in to consideration the future income growth of the person in the second method. This is therefore, not an exact way of calculating human life value. This is only a representation to get a clear picture of human life value and its importance.
Finally, my advice is to have enough life insurance cover which matches your Human Life Value.