Most of us arbitrarily decide on the amount of insurance we need. Few of us base our estimation on the following factors;

• Age
• Income levels
• Number of dependants we have
• Expected financial responsibilities

But the optimal life cover for a person is more accurately captured by Human Life Value concept.

Under this, we ascertain the level of insurance for a person based on income method or expense method. It is that amount, which can ensure that the standard of living of the family is not affected even if the earning member is not there. This would be the total amount one needs to invest today, which would equal the lifetime earnings of a person.

Income method says:
Human life Value = Capital required to protect the life style+ Total Liabilities – Total Assets

Capital required to protect life style is based on assumptions regarding;
1. Current annual Income
2. Growth rate of annual income (assumed to be a fixed rate)
3. Number of years to go before retirement
4. Self maintenance expenses

Expense method is a bottom-up approach to determine human life value. We calculate the annual expense required by the family to maintain a level of lifestyle and add to it the expected major financial requirements, for eg, Rs. 10 Lac per annum. Assuming a particular growth rate for investments, say 9%, we arrive at the lump sum (sum assured) required to generate the aforesaid annuity by capitalizing the growth rate.



The factors used to determine tend to be dynamic in nature, changing with time, and so does the optimal life cover that we have. Human life value calculation may not be fool-proof and will require updating when the underlying parameters change dramatically.

The key to keeping your life insurance up-to-date is to make sure that the total death benefit on any life insurance policies you have is sufficient to meet your needs at that time. If your insurance is insufficient, you may be able to obtain additional insurance; either from your existing insurance company or by obtaining a completely new policy.The first step to getting a life insurance is by the way of a term plan.