We all know the importance of life insurance. It offers financial support to the dependents of the insured in the unfortunate event of the insured’s demise.
That is why it is so important to have adequate life insurance according to one’s specific needs.
Says Sanjiv Bajaj, joint chairman and managing director, Bajaj Capital: “Experts in the insurance industry believe that when purchasing an insurance policy, one should follow the basic rule of thumb, which says that one’s life insurance cover should be at least 10-15 times one’s annual income. A person earning Rs 10 lakh per year must have a life insurance cover of at least Rs 1 crore.”
The most important factor to consider while buying an insurance policy is the number of years your dependents would require a monthly income. At the same time, it is critical to consider outstanding loans as well as regular and one-time expenses, such as your child’s education.
Thus, a more accurate way of knowing how much life insurance you would need is by calculating your human life value.
What Is Human Life Value?
Human life value (HLV) is a critical factor that many people tend to overlook while buying a life insurance policy.
Technically, HLV is an important concept in calculating the total income that an individual is expected to earn over the course of his/her working life. It tells one about the present value of his/her income, expenses, liabilities, and expenses.
It is used to understand how much money will be required to secure the life of the dependents in the unfortunate event of the breadwinner’s demise.
“The level of financial protection your dependents would require in your absence is directly proportional to your actual value. So, it is critical to understand and calculate your actual value correctly,” says Bajaj.
To calculate HLV, you would have to first determine your current income. Then, subtract your expenses, insurance premiums, and income tax payments. Identify the number of earning years remaining before your retirement. Find the inflation and discounting factor rate. And then, determine the current value of the required income stream by adjusting inflation.
There are several human life value calculators available on the Web where one can key in the required numbers to arrive at one’s human life value.
What Should You Do?
Before deciding on the sum assured required, certain factors must be considered in order to determine your true financial worth.
Adds Bajaj: “The most important thing you must do is assess the extent of your current protection needs and determine the appropriate amount of life insurance required. This will assist you in ensuring the financial security of your dependents in the future.”
Ideally, one should go for a term plan for life insurance needs as that provides higher life coverage at the lowest available premiums.