'HUMAN-LIFE VALUE APPROACH'
A method of calculating the amount of life insurance a family will need based on the financial loss the family would incur if the bread earner person were to pass away today. It is usually calculated by taking into account a number of factors including but not limited to the insured individual's age, gender, planned retirement age, occupation, annual salary, inflation, employment benefits, as well as the personal and financial information of the spouse and/or dependent children.
Since the value of a human life has economic value only in its relation to other lives such as a spouse or dependent children, this method is typically only used for families with working family members. The human-life approach contrasts the needs approach.
Since the value of a human life has economic value only in its relation to other lives such as a spouse or dependent children, this method is typically only used for families with working family members. The human-life approach contrasts the needs approach.
Remember, when using the human-life value approach, you'll want to replace all of the income that's lost when an bread earner of family dies. To be more precise, you'll want to include only the after-tax pay, and make adjustments for expenses (like a second car) incurred while earning that income. Also, don't forget to add the value of health insurance or other employee benefits to the income number.
Illustration of Mr. Sharma's Human Life calculation and deriving difference in pure life cover needed for Mr. Sharma's risk cover for his family as a bread winner income loss if any untoward happening happen to Mr. Sharma's life in future.
Mr. Sharma's age (Years) - 30
Age of spouse (Years) - 27
Life expectancy of spouse (Years) - 70
Age of child (Years) - 3
Child's share of monthly household expenditure (%) - 10
Child will remain dependent till (Years) - 22
Monthly household expenditure (Rs) - 40,000
Of the above, how much is spent on Mr. Sharma (Rs) - 10,000
Expected inflation in household expenditure (%) - 5
Money to be set aside for child's education (in present value terms) (Rs) - 1,000,000
Money to be set aside for child's marriage/other needs (in present value terms) (Rs) - 750,000
Outstanding loans (Rs) - 1,500,000
Other liabilities (Rs) - 500,000
Medical expenditure/emergency fund (Rs) - 500,000
Rate of return on low risk securities/deposits (%) - 8
Human Life Value (Rs) - 16,645,475
If the rate of return on low risk securities/deposits is (%) - 7
Revised Human Life Value (Rs) - 18,183,996
Current Life Cover of Mr. Sharma from Employer (Rs) - 10,00,000
Current Life Cover bought by Mr. Sharma from Life Insurance companies (Rs) - 20,00,000
Total Life cover Mr. Sharma have as on today (Rs) - Rs 30,00,000
Term Insurance needed to be bought to cover up all life risk = (Revised Human Life Cover - Total Life Cover Mr. Sharma have as on today)
Term Insurance needed to be bought to cover up all life risk (Rs) = (18,183,996 - 30,00,000)
Term Insurance needed to be bought by Mr. Sharma to cover up all his life risk (Rs) = 15,183,996
Manish K Pandey
CEO & Founder Director
Fern Wealth Advisors Private Limited
Navi Mumbai
Email - fernwealthadvisors@gmail.com
# +91-9830040603
Gud info for lay mans.
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