What value of your life? How much life insurance do you need?
03 Jul, 2014 03:03 PM
Assuring adequate financial security to the family members is a top priority for every working individual.

If you have decided to either buy a new life insurance policy, or being pursued by an insurance agent to buy one or are reviewing your life insurance portfolio, chances are you are also wondering how much life insurance do you really need or if you already have enough?

It’s not easy to answer that question. Because, it takes into account your complete financial position, future commitments and liabilities. Assuring adequate financial security to the family members is a top priority for every working individual, given the uncertainties of life.

There arises the need to understand the concept of human life value (HLV). The concept is something that we all hear about, especially from insurance advisers, but do not really know how to calculate. 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. The most common definition of HLV is the expected lifetime earnings of an individual, i.e. what is the total income that the individual is expected to earn over the remainder of his working life, expressed in present rupee terms.

For the uninitiated, inflation eats away the value of money; a rupee today is worth more than a rupee tomorrow and therefore one needs to suitably 'discount' future earnings to express the value in present rupee terms.

Our view on how HLV should 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. Why do we define HLV in this manner? (note that we do not factor in earnings at all).

Simply because even though expected income 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. So, the HLV thrown up by our definition is really a 'target' that you should have in mind; you can and possibly may have to plan for a lower HLV, but don't despair over that.

The important 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. Would it be a good move or a bad move?
We need to first talk about fundamentals of Insurance and then mull over the policy decisions. What happens in an average Indian household? There is as an earning member and his family comprises of wife, kids, parents. The head of the family, most often the male member, earns, and his family lives happily. In case of his/her death, and if the family does not have enough corpuses to fall back upon, their standard of living will undergo a huge change, leaving them unsecured and traumatised.

While there may be many ways to protect family against life's uncertainties, none has the charm of insurance products, which is the surest way to mitigate risk. Insurance addresses five key needs in a customer’s economic lifecycle, which include savings, protection, children’s future solutions, investment and retirement.

Not just that. For working individuals, it is the best way to regulate savings. Some of the important things one must consider before investing in any insurance policy is coverage of that policy, benefits in the long run, term of the plan and the premium amount to be paid.

Choose a policy depending upon your income, so that you will not face concerns over premiums. Note that the inability to pay premiums is the main reason to discontinue the policy. Take a good look on the plan and the benefits. While you take feedback from financial consultants, it is important to do one’s own study either through discussions with people in the know or desk research.

We all live with dreams – dreams of a house, luxury car, holiday abroad so on and so forth. In order to realise these, it is important to have a financial goal in mind and work towards achieving it.
Source : Money Guru India

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