How to Calculate Human Life Value: Step-by-Step Guide
There are different ways to calculate human life value (HLV). Calculating your HLV requires determining your life's financial worth in terms of your potential earnings and potential expenses. Although the concept of HLV is subjective, companies use solid methods to determine an individual's HLV. The two popular methods are need-based and income-replacement methods.
1. Income Replacement Method
In this method, your life value is calculated based on your annual income. The HLV is determined as:
Your Annual Income * Years Left for Retirement
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For example, if your income is ₹10 Lakhs per year and you are currently 35 years and plan to retire at 50, your HLV is at least 10,00,000 * 15 = ₹1.5 crore.
2. Need-Based Method
The calculation is done based on day-to-day expenses till the life expectancy of the youngest member of the family. The factors considered for assessment are the number of dependents and their needs, loans, children's education and marriage, your lifestyle, etc. Once you sum up everything, the value that comes up is your Human Life Value.
You can calculate HLV using the online calculators available. However, you should know that the value keeps changing. The number changes with your life stage, family condition, and annual income. If you calculate the human life value at 25 when you are single, the value will differ when you calculate it at 35 when you are married and when you have children. Hence, revisit the calculation regularly and do not see it as a one-time activity.
Determining the Human Life Value could seem very vague, but it is very important in risk management and financial planning. Calculating Human Life Value in insurance can help people make well-informed decisions regarding planning for their future.
Step-by-step process on how to calculate your HLV
1. Evaluate Income The very first step in figuring out your HLV is to evaluate your current income and future potential earnings. Take into account factors such as age, skills, education, and potential career trajectory. It is vital to estimate your future income growth over your potential working years and take into consideration the various potential promotions, salary, and job changes. This assessment works as a baseline for estimating your economic value to your family or dependants.
2. Determine Expenses: Calculating HLV requires you to have a grasp of your current and future expenses. These expenses include costs related to all your essential needs, like housing, transportation, food, and more. It is also important to consider inflation and potential changes in lifestyle as you progress through your life and career. Understanding your current and potential expenses gives an insight into the financial support required to provide your family in your absence.
3. Calculate Financial Needs: The next step is to figure out the financial needs of your dependents in case of your premature death. Consider the number of people dependent on you, their age, education costs, healthcare, and any debts. Take into account both short and long-term financial requirements. For example, if you have children who just graduated from school, their college costs and any other expenses will be taken into account. The same would be the case for any retired parents, where their medical and living costs would be taken into account.
4. Count Liabilities: You must consider your debts and liabilities when calculating your Human Life Value. These liabilities include personal loans, mortgages, credit card debts, and other such liabilities. These expenses must be settled in the event of an individual’s death. If they aren’t accounted for and dealt with, these expenses could impact the financial conditions of your surviving family even more than they would otherwise.
5. Calculate Inflation and Discount Rate: Inflation is a very important metric to account for when calculating your HLV. Adjust all future income and expenses for inflation to have an accurate judgment of your HLV. You will also have to account for discount rates and apply them to those future earnings. Do this because those future income and expenses are worth less in comparison to today’s expenses. This discount rate takes into account the potential return that could be gained from investments over time.
6. Evaluate Your Final Value: Apply the discount rate to all future earnings and expenses. This will then reflect the value of those future earnings and expenses in terms of the present value. Adding up these present values will provide you with a fairly accurate estimate of your HLV.
