You may have chosen to buy a term insurance policy to financially safeguard your loved ones from the uncertainties of life. It is undoubtedly a good decision since there are many term insurance benefits that you will also get. However, before you purchase your policy, it is a good idea to calculate your HLV or Human Life Value. This will help you choose a better coverage amount for your term insurance policy since you want to avoid being stuck in a situation where you have insufficient coverage that leaves your family unsecured.
What is the ideal coverage under a term insurance policy?
The ideal life coverage or sum assured for a term insurance policy depends on your current stage of life. If you are younger than 40, consider choosing up to 20 times your annual income. Those above 40 may also go for 10-15 times their annual income. Family expenses and size are also factors to consider in this regard. A more effective way to work out suitable coverage is by knowing your HLV or human life value.
What do we mean by Human Life Value (HLV)?
It is not as easy to always link a specific value to one’s life. We often find it tough to have conversations about death, let alone calculate the value of a lifetime as a monetary figure. However, this framework will help you work out the financial support your family will require when you are not around. Taking life’s unpredictability into account, every individual should check their HLV before buying a term insurance policy.
While it is impossible to make up for the actual living presence of an individual, you can still purchase sufficient coverage to enable your family members to at least financially secure themselves from further problems in case of your demise. HLV calculations are not done based on the value that an individual generates for the family or household. Instead, the calculation considers the financial value of an individual and their existing liabilities. Other aspects like living standards, income changes, and inflation rates are crucial for working out the right amount.
HLV Calculation- How to go about the process?
When working out the HLV (Human Life Value), you should consider your age, along with your probable retirement age. Then take your current monthly expenditure, payments, EMIs, savings, and possible future costs into account. You should also consider other costs, like higher education for children and weddings in the future. For example, suppose an individual is 30 years old and earns around Rs. 30 lakhs per year. Hence, the person should consider life coverage exceeding Rs. 5-6 crore.
Does this seem huge and unnecessary? Initially, it may appear that way, but the calculation will help you understand why. Working out long-term rates of fixed deposits and inflation rates will indicate that if life coverage stays at a base amount of Rs. 1 crore, then the family will have to fall into debt to cover their projected expenditure. But, on the other hand, with a sum of Rs. 5-6 crore, the entire family will be able to keep their lifestyle afloat for many years while staying free of stress and covering the healthcare and educational requirements of all the members.
Hence, while buying term insurance is an excellent move, you should calculate your HLV correctly. If you go for insufficient coverage, your policy will not safeguard your loved ones financially, and they will soon run out of funds. Hence, you should buy life coverage, a bare minimum of ten times your annual income. Depending on various life changes, you can periodically review your coverage and scale it up. If possible, set aside some time to work out the real value using the above-mentioned parameters. This will help you find the right amount you can choose as your term insurance coverage. Remember that buying insurance is a long-term or even lifetime decision. Hence, you should not neglect the coverage aspect while going ahead with the process.