Understanding Human Life Value (HLV) Approach

Placing a value on human life is not possible. However, putting a relative value on a human life is possible. It must be related to what will be lost in case of a death of the person. This will be the present value of a person’s estimated future earnings that will be used to support dependents in case of any mishap in the person’s life. Human Life Value (HLV)  or income replacement approach is a method to determine the appropriate amount of insurance  a person needs to buy at present in case of future loss of income.   

By understanding a HLV of a person, can ensure that the standard of living of the family member is not affected even if the earning member is not there.  In simple words it is based on simple reasoning that the value of one’s life is equal to his earning capacity. And in the event of his death it is his or her current as well as future prospective income which is the real financial loss to the family member. 

So, in that case sum insured should take care of loss of income apart from anything else. To determine human life value there are three main factors - a person's age, his current and future expenses, and his current and future income. From this methodology, the current insurance cover can be reduced to arrive at your additional cover requirement.

For example, assume an individual takes home Rs 30,000 per month and Rs 6,000 of that can be directly attributed to his or her expenses. As a result, the family loses Rs 24,000 per month, if that person dies. Assuming the individual is 30 years old today, and he plans to retire at age 60. That means the dependents will lose the present value of Rs 24,000 per year, adjusted for expected increases over the next 30 years of his life till retirement.

Consider the present value of an annuity due for 30 years, using a Rs 24,000 shortfall as the payment and minimum return of 9 per cent. This may seem like a lot, but calculate how much this individual would be earning 30 years from now by inflating Rs 24,000 at 6 per cent (annual salary increase) for 30 years. The result is an annual income of approximately 60 lakh. 

One of the major drawbacks of HLV approach or index calculation is estimating future levels of income. These changes are expected as an individual progresses in his/her career, and therefore becomes one of the crucial factors of life value. Estimates of future earnings can be best based on nothing more than a projection based on current earnings of the person’s present occupation.

Steps to Calculate HLV