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How Much Should You Be Insured? HLV Concept A revolutionary approach propounded by Prof. S. S. Huebner which had brought about a new economic philosophy of Life Insurance When a child is born, a new life begins. As he grows into an adult, he acquires education, character, initiative, drive, experience - in short; he acquires knowledge and skill which gives him earning power. This earning power enables him to satisfy his needs - present and future. It is this earning power/productive capacity which is his human life value. It is this earning power which is insured and not life. One can easily see that when a retarded child is born, a life is born but it does not add economic value to itself because knowledge and skill are not acquired. “In short, human life value is the economic interpretation of life insurance” Conceptual framework of human life value: There are two types of capitals: Human capital and Material capital There are two types of economic values: Life values and Property values At any time, the human life value in society is far greater in magnitude than the value of all property put together. The life values are the causes and creators of property values. For example, on rough estimate, in the year 1959 the property values in United States were estimated to be 750 billion dollars and capitalized human life value was estimated to be 3500 billion dollars. Hierarchy of human needs
People work to satisfy their needs. No one is ever totally satisfied at any stage. Needs are ever-growing and expanding vertically and horizontally, unless one becomes a fakir or attains nirvana. Human life value concept Human life value, expressed with a monetary valuation, should be carefully appraised and capitalized. The concept of human life value is based on the fact that every person who earns more than is necessary for his own self-maintenance has a monetary value to those who are dependant upon him. It may therefore be defined as the capitalized value of that part of the earnings of the individual devoted to support the family dependents, business associates and others who benefit from the economic capacity. It is an established fact that a Life Insurance policy insures a life in as much as a fire policy insures a house or property. • The active life span of a man: Equivalent to the productive life of a physical asset • The projected earnings of man: Equivalent to the future returns expected from employment of a physical asset • The projected personal expenditure of an individual is: Equivalent to the projected depreciation and maintenance cost of a physical asset Human life value approach The economic value of an individual to his dependent in terms of Life Insurance can be estimated as accurately as possible as under: To determine the amount of earned income devoted to the family, the following steps should be followed:- • Estimate the individual’s average annual earning from future personal efforts. In some instances, the income is obtained on invested funds that have been accumulated or inherited, but in the overwhelming majority of cases, the family depends upon the current earnings of the bread-winner • Deduct income-tax, Life Insurance premium, personal expenses, cost of self-maintenance, etc. • Determine the working expectancy of the individual, i.e. his probable productive working period. Determine the number of years between the present age and contemplated age of retirement • Select a reasonable rate of interest at which future earnings should be i.e. find out the present value of the future earnings by discounting it at a reasonable rate of interest, which is generally assumed and payable on the proceeds left with the insurance company • Multiply the amount of earned income devoted to the family by the present value of Re. 1/- payable annually for the working expectancy, utilizing the rate of interest selected (Use appropriate discount interest factor from the tables below) Thus if an individual had an amount of Rs.2,00,000 out of his annual income as devoted to the family and he has a working expectancy of 30 years, he should be worth Rs. 24,80,000 to his family today, assuming the rate of interest of 7%. To the extent possible, this income flow should be capitalized in the form of Life Insurance Policy on the producer of the income, after deducting the capital already created by him during his income earning period. The moment a person is insured (has knowledge of the potential estate) this is bound to have a salutary effect on his initiative and dynamism on his business plans and thus increase his overall productivity because Life Insurance helps to allay one’s worry and fear about uncertainty. Purchase of Life Insurance is just plain common sense from a business point, and just necessity when a dependent family is involved, an ethical duty of the husband, a wife’s right and a child’s claim, because in life there is no action reply.
How to measure monetary value of an individual to his dependents in terms of life insurance
Notes: • The amount shown in column (4) above is the discounted value of the amount shown in column (3) above • The income flow shown under column (4) above should be capitalized in the form of Life Insurance policy on the producer of the income after deducting the capital already created by him during his income earning period • Present value will vary depending on the discount interest rate assumed as given in the table above • As per the remaining number of years of earning span, select the interest factor as per the rate desired |
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