Life is precious. We like to celebrate it because we only get it once. Death is inevitable. We don’t like to dwell on it because it doesn’t only mean the end of life, but also sadness for our loved ones. If you are a primary earning member of your family, death can also cause more than sadness for your loved ones. 

Which is why, be it ensuring the funeral or burial expenses are met, any lingering debts are paid off, or day-to-day expenses are made less burdensome, a life insurance cover is important. It is an agreement in which the family of an insured party gets a specified amount from an insurance company, as long as certain premiums are paid on time. This amount ensures that the loved ones have not only peace of mind, but also financial protection after an earning member passes away.

It can, however, be cumbersome to choose a life insurance policy that suits your earning potential. All families differ in their earnings, number of family members, expenses, future goals. So, what kind of life insurance policies exist for you? How do you determine which policy will be right for you? What should be an ideal life cover for you and your family members?

This blog may help simplify your understanding of it, and also help take the right call. But first, let us understand how Human Life Value is determined.

Calculate Human Life Value (HLV)

How do you put a price on life? Well, the Human Life Value is a method that helps determine the monetary value of human life, measured typically by considering all the aspects of an earning person and dependents. It is the value of all your future income you can expect to earn before you reach a retirement age. This is also an indication of the economic loss an earning person’s family may expectedly suffer, due to his or her untimely demise. 

Essentially, Human Life Value indicates your life insurance needs based on everything from your income, assets, liabilities, savings, to debts and expenses. It also means that if you take a right life insurance policy with an ideal coverage, your family will have adequate financial protection to maintain the same living standards, and/or meet any leftover financial obligations. But how do you calculate human life value?

Well, you can begin by considering the following factors:

• • Your present age
  • The age you want to retire
  • Your monthly expenses (include everything from daily essentials, monthly EMIs, to medical expenses, rent, travel needs etc.) 
  • Your assets
  • Your liabilities including future expenses like your marriage, future child(ren)’s education, business/personal debts etc.
  • Your savings
  • Any details of existing insurance policies (vehicle, home, medical etc.)

While you may take the help of any HLV calculator available online across policy providers, you still may not have a clear picture of the adequacy/inadequacy of the life cover you want to take. Given life isn’t constant throughout your journey, your HLV may be different at 25 versus what it may be at 35. Which is why for the sake of accuracy, you need to dive deeper with a few more vital considerations. 

Calculating monthly recurring expenses

Let us begin by the best ways to calculate your family’s recurring expenses. Also referred to as ‘fixed expenses’, recurring expenses are ones that repeat every month or at regular intervals. You can account for items like rent, taxes, various insurance expenses, mobile payments, professional fees, student loans, the amount paid for Netflix subscription and the likes. Ensure that you also account for variable recurring expenses. For example, the electricity bill for summers is more than that of winters. Or, you may have more expenses for outside food if you are a bachelor, versus less expenses for when you are married. Then comes periodic expenses. These are payments you may have every other month, or quarter or even yearly. For example, you may have an annual subscription for car or medical insurance, while a quarterly breakup for life insurance, or yearly payments for annual taxes. You can also have monthly debts like credit card bills, personal loan EMIs or business debts to pay. If you are married or have the responsibility of parents, you need to account for not only yours, but the entire family’s recurring expenses.

Understanding your commitments and liabilities

Accountants often come across the terms of commitments and contingencies or liabilities. But what are they? Let’s begin with commitments. We all have one. We may commit to a new year resolution of a gym subscription, or a car that you want to get your loved one. Say you promised yourself a new home or a lease on a commercial building for your business. Commitments are therefore the expenses you have promised in all your future months within the time of the lease. Remember to include maintenance fees, utility bills and such, to have a generally accurate idea of your commitments. But what are liabilities? Well, both short-term and long-term liabilities are the total debts you owe to creditors at present, which you would pay over a certain period of time. Tax liability for instance, can refer to property taxes you owe the government in addition to monthly home loan EMIs. Or if you have a business, and it has had more expenses than revenues in the past two years, the difference between the two is referred to as liability.

If you think you have an accurate picture of your expenses and liabilities, don’t forget that the price of any product or service doesn’t remain the same over time. 

Calculating for inflation

Inflation typically refers to the decline in the purchasing power of currency over a period of time. The general level of price naturally increases over time. While it is generally easy to measure how the price of say, a cup of coffee increases over time, human needs tend to go beyond one or two products. This is where accounting for inflation helps measure how the cost of living can increase like food grains, fuel, electricity, healthcare and more. CPI or consumer price index is a widely used indicator to identify the inflation rate of the rupee in India. You will also find several online calculators to measure inflation of any goods or services. Using CPI for example, you can know that if a litre of milk costs INR 25 in 2021, it may cost up to INR 45 in 2045. 

The thumb rule to calculate how much insurance cover you need

Once you know your expenses and earning years, you can calculate the coverage you need over the years. Financial advisors typically recommend choosing a coverage worth 10 to 15 times your annual income. You can then calculate your earning years and multiply them by your current annual income. For example, if your annual income is INR 10 lakhs and earning years equal 15 years, you should get a life insurance worth INR 1.5 crores. At the same time, if your earning potential is currently less, or the expenses of your dependents are on the higher side, you may opt for a conservative cover amount and expand on the sum insured over time. 

That said, given the financial circumstances of every person differs from the other and from time to time, it is best to seek advice from a financial advisor instead of going by the sales brochure of any policy provider. 

Why it makes sense to seek financial expertise

An objective financial advisor is your best bet to invest in your future. For one, complex calculations into all the dynamic costs of your future should account for all the possible expenses including wealth generation or tax planning. For another, making such decisions insurance agents can be motivated by profit. Furthermore, with a financial advisor, you can discuss your financial goals, receive objective education about financial services that may make sense for your future, and even seek continuous advice based on your evolving financial situations. Finally, certified financial advisors are also licensed to sell a variety of insurance products with a complete picture of your total financial picture.

Bottom line:

You can live through life in fear of cautionary tales from people around you, or you can take control of your life. We only get one life that is precious, not only to us but also to our loved ones. How we get to lead it – no matter the consequences or how it ends – is on our own selves. Life insurance is an important product because to save more in the long run, you also need to begin early. For that to happen, you also need time to deeply understand what you own and spend on, what you will own and spend on, as well as the kind of future you want to leave your loved ones in. Thus, if I can leave you with any lesson, it is this – life changes – with good ways and bad ones. The best you can do is be prepared for anything it may throw at you.