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Looking to buy a term insurance policy? Calculate your Human Life Value (HLV) first

Buying a term life insurance policy is the decision of a lifetime. So, it’s important that the amount arrived at is correct. Human life value (HLV) is one of the methods of computing the right cover amount.

December 28, 2022 / 09:03 AM IST

Five years ago, Rahul, a working professional living in Delhi, took out a term insurance cover for Rs 50 lakh. At that time, it seemed good enough.

However, now that he is married and has a one-year-old son, he thinks the cover amount might not be sufficient in case anything unfortunate were to happen to him.

Especially after seeing how COVID-19 has ravaged lives and families, he thinks he should have opted for a higher coverage. Like Rahul, there are many policyholders or potential buyers who wonder about the adequacy of the sum assured (SA) in their policy.

More so, during the peak of the pandemic, several people resorted to panic buying and bought term insurance without proper research, especially with respect to the SA.

Estimating the ideal cover amount

So, how much should a person be covered for?

The right sum assured is dependent on the stage the person is in when the cover is being bought. For instance, if the person is below 40 years of age, he/she must go for a plan that has a cover of 20 times the annual salary. Those above 40 years of age should opt for a sum assured that is 10-15 times the yearly income. Also, make a note of the size of the family and their expenses.

There’s an easy way to calculate the coverage amount and put to rest all doubts regarding this aspect. For evaluating the term insurance cover amount, you need to know the Human Life Value (HLV).

Also read: Insurers seek separate tax deduction basket for life policies, higher limit for health premium

What is Human Life Value?

While death is already a difficult conversation in India, attaching a price to life is even more difficult. Quite obviously, there’s no way that one can put a value on life, but this is used to largely estimate the kind of monetary support your dependents will need in your absence.

Given the transient nature of life, it is recommended that everyone should not just opt for a term plan, but do so only after evaluating their correct HLV.

No value can replace a person's presence; that's a fact. However, the truth still is that a policy that is bought to secure the future of your loved ones should be able to at least mitigate their financial distress.

Contrary to popular belief, HLV is not calculated based on the value that one brings to their household. It is, in fact, calculated taking into account the policyholder’s financial value and also the liabilities in the course of the person’s life.

Add to it, several factors like changes in income, lifestyle, standard of living and rate of inflation play a vital role in deciding the correct amount.

Also read: Why term insurance with return of premium option isn't the best risk cover for you

How to calculate HLV?

Coming to the calculation of HLV, one should consider the person’s current age, potential retirement age, monthly expenses, EMIs, monthly payments, current savings and any probable future expenses. One should also consider one-time huge expenses like children’s education or marriage to calculate HLV.

For example, a 30-year-old with Rs 25 lakh annual income should look at a total life cover of Rs 5 crore. While this may seem huge for a few, the reality lies in the detailed calculation. A simple calculation basis long-term fixed deposit (FD) rates and inflation movement will show that the family will have to take a loan for their regular expenses if the life cover is kept at Rs 1 crore.

However, with Rs 5 crore, the family will be able to maintain the current lifestyle stress-free, and provide the best of education to the children and healthcare for all members.

To conclude, having a term insurance policy is undoubtedly a step in the right direction to protect your loved ones. However, this pure intent can go wrong if the HLV is not correctly calculated.

In such a case, rather than serving them as a shield from a storm, it would only save them from a drizzle. So, as a thumb rule used by most insurance companies, buy insurance cover of at least 10 times your yearly income.

Still, it is advisable to calculate the actual value using the above considerations to arrive at an adequate SA under your term life insurance policy. Many online calculators help you calculate the HLV. So, use the tools, compare the policies, and read the terms and conditions carefully. After all, it is truly a decision of a lifetime and cannot be done without evaluating every aspect carefully.
Rhishabh Garg is Head - Term Life Insurance, Policybazaar.com
first published: Dec 28, 2022 09:03 am