For a common man, who is unaware of Financial planning, the meaning of insurance is not known in the right perspective or concept of insurance is mis-understood. The simplest way to understand insurance is it’s a means of protection from financial loss. It is a form of risk management, primarily used to hedge against the risk of a contingent or uncertain loss. The dictionary meaning states, insurance is an arrangement by which a company or the state undertakes to provide a guarantee of compensation for specified loss, damage, illness, or death in return for payment of a specified premium.
Let’s start with the scenario of buying insurance to the mid 1990’s. Taking my own example, I have earned my first salary check & looking to build my career. Initial 2-3 years, there is no need of any income tax calculations, as the money that I was earning was below the threshold of income tax limit.
However, from the next year, I find that there is tax deducted at source in the Company pay slip. The tax amount for the financial year is calculated upfront & is deducted on a monthly basis & is usually spread from April to March. In this way, for the salaried class, the pinch of Income tax will not be felt, unlike a private business person, who generally rushes for various investment products in the month of Jan to March & may not be paying much heed whether such a financial product suits them or not. The main motto of buying a financial product, generally with a majority of them including the salaried is to save tax.
In the mid 1990’s & till 2001-02 or so ,i.e. when there was only one Life Insurance Co. in India, usually the agent who approached us, usually came through a known reference, either from a colleague, friend, neighbor, relative, or so. The only policies that were advocated to us were the typical Endowment & Money back policies. Unit Trust of India (UTI) was another entity, which was having an ULIP product.
Endowment was suggested as a Savings, wherein we are supposed to pay the premium yearly/half-yearly/quarterly for at least thirty years! Every year bonus will accrue & can encash at the end of policy term. We could also take a loan pledging the insurance policy document !Money back policies were suggested in case we do not have the patience for waiting for a long duration, we can be happy if we get the bonus or cash back amount every five year term.
We as customers, were never told the importance of buying (having?) insurance & no one even told about Term plans, even though it was there in the list of LIC policies. We were told, in the case of any unfortunate event to the policy holder, the sum assured would be paid to the nominee of the policy/family, with the bonus amount accrued ill date. In case of accidental death, then the family/nominee receives double the insured amount.
Also, usually we never asked the right questions to the agent. At the most, the comparisons of various policies within LIC was discussed, the premium amount, that’s all. After we finalized which policy, then the agent fixes the appointment at the nearby Diagnostic Centre/Clinic, for the medical checkup. Being in the mid-twenties, usually we are healthy & no adverse health conditions, so the Company [LIC] issues the policy, which is usually received by post.
In year 1999-2000 or so, the Government opened up the insurance sector to the private Companies, wherein they could have 26% foreign direct investment (FDI). The Insurance Regulatory body-IRDAI was also established.
With the entry of private Companies, the insurance policy sales people were called as ‘Financial Advisors’ (though not in a holistic sense, only from an insurance perspective I guess). For the first time, I came across the term called as Human Life Value being discussed with customers.
I strongly feel that the earning member of the family has to necessarily make a plan or make it a priority, to provide for the dependent family members, a regular source of income or pool of funds which can be used by the family members in case of any untimely demise of the earning member/bread winner in the family. Hence, calculating the HLV is an important exercise that one has to undertake mandatorily.
HLV usually involves taking into account the total income that the individual is expected to earn over the remainder of his working life, expressed in ‘present’ Rupee terms.
In stricter sense, HLV should include the sum total of the monetary values of all future needs an individual’s spouse and the family dependents, along with the values of all outstanding liabilities. This will be more accurate/realistic & give a true picture of the financial commitments of the family.
The steps to determining the HLV is listed below. (This has been taken from the Personalfn website, hence give due credit to them & also express my thanks, gratitude for the same.)
Step 1: Determine the tenure over which you wish to provide for your dependents
The first step is to decide the horizon over which you wish to provide for your dependents. For married individuals, the horizon ideally should be the remaining lifespan of his/ her spouse. For this, you will need to assume the life expectancy of the spouse and then deduct it from the current age. The resultant figure is the time frame over which you will have to provide for your spouse.
For instance, if the current age of your spouse is 30 years and you expect him/her to survive until the age of 70 years, then you have to provide for another 40 years (70 less 30).
Step 2: Account for your dependents’ life stage events
In the process of determining the HLV, you will have to make certain estimates. One of them is to determine your dependents and the amounts that you wish to set aside for them. If you are married, the dependents will typically comprise your children and your spouse.
You will need to determine, what percentage of the monthly household expenditure your children account for and till what age they will remain dependent on you. This is important since once the children start earning, they are unlikely to be dependent on you. Beyond that, you will only have to provide for your spouse (in case you have no other dependents).
Also, you have to account for other expenses, for example a) Money you wish to set aside for children’s education, b) Money you wish to set aside for children’s marriage.
This is important because these are typically the kind of events that you would like to ensure that your children don’t miss out on, even in your absence.
Step 3: Account for your current household expenditure
Calculate your current household expenditure; more importantly find out, of that, how much you spend on yourself.
For example, let’s assume that your monthly expenditure is Rs. 25,000, of which, you spend Rs 5,000 on yourself. Now, in case you were to meet with an eventuality, your dependents’ monthly household expenditure would be the balance, i.e. Rs 20,000 (Rs 25,000 less Rs 5,000) per month or Rs 240,000 per annum.
This figure (after adjusting for inflation) will be your dependents’ future household expenditure i.e. the sum that you wish to provide for.
Step 4: Factor in the impact of inflation on expenditure
The next step is to determine the future household expenditure. For the same, you will have to factor in the impact of inflation on household expenditure. It must be noted that adjusting expenditure for inflation is an essential part in the process of calculating HLV. Inflation is a situation wherein too much money chases a limited number of goods.
This leads to a fall in the value of money. Inflation is also expressed as a rise in the price level. As a result, a higher amount needs to be spent to buy the same objects/goods. So over longer time periods, it becomes pertinent to factor in the impact of inflation on expenditure.
Step 5: Determine the present value of the expenditure
After arriving at the future expenditure, the next step is to determine its present value (a Rupee spend in the future, is worth less than a Rupee today; this is the impact of inflation).
In other words, you need to compute how much your total future expenditure works out to in present monetary terms. For doing the same, you have to discount future expenses, using an assumed rate of return; generally the rate of return on low risk securities/deposits is considered as the discounting factor.
This will give you an idea as to how much amount you will have to keep aside, to provide for your spouse/dependents in your absence.
Step 6: Consider the present value of outstanding liabilities and medical expenditure The process of computing the HLV is not complete without accounting for your outstanding loans/liabilities (like your housing loan or car loan, for instance) in present value terms.
This needs to be taken into account because it will aid your dependents in paying off debts/liabilities in your absence. This will ensure that they don’t have to sacrifice any amenities provided by you during your lifetime. Besides, the amount that you wish to set aside for medical expenditure also needs to be added to the present value.
The amount arrived at the end of this process is the individual’s Human Life Value.
Finally, calculating the HLV is not a one-time event. While calculating HLV, you have to make few crucial assumptions such as the inflation figure and the low risk rate of return, which are not fixed and are bound to change.
Furthermore, changing lifestyle could also necessitate a change in the expenditure. This makes the HLV a moving figure. Hence, it is important that you revisit your HLV calculation every year, preferably with the help of a financial planner to ensure that your dependents are adequately provided for at all times.
Recall that from 2004 onwards or there about, the private insurers were aggressively pushing for ULIP [Unit Linked Insurance Plan]. Only a minority of them did mention of the Term plan, which is the desired policy one must necessarily have.
By this time around, gaining access to Internet was becoming easier, although with high data rates. With access to Internet, I was gaining some basic financial knowledge without only looking for a tax exemption. With my Corporate job becoming more demanding & with additional responsibilities, I thought it’s prudent to discuss about my financial life with a professional Financial Planner, who will have interests of the clients at heart. Additional, the planner had a CFP [Certified Financial Planner] certification too.
My personal experience is to get our financial life in order & for knowing the right financial products to buy, it’s better to go with a Financial Planner, who charges a fee from the clients & have a trustworthy relation. It definitely gave me a peace of mind, also the financial goals that I had work on.
With the interaction of the Financial Planner, gained the following knowledge –
-we should never use Insurance for investment purposes, instead it should be taken only for protection of income purpose.
-we should never combine protection & investment needs, they need to be kept separate.
-complete Insurance coverage includes – Health, Home, and Accident coverage too
- [Vehicle insurance has to be purchased at the time of buying the vehicle-car, two wheeler. Unfortunately, in India at least insurance has to still be pushed/coaxed to the customer for buying, rather than them voluntarily opting for it.
- Do check out the some of the best free insurance mobile apps at – https://leofitgenesis.com/free-insurance-apps-software-for-mobile/ ]
To list point wise the importance of insurance as a part of Financial planning –
– Insurance ensures family’s financial stability in case of an unfortunate event to the bread winner
– Insurance brings peace of mind to the family, as future financial goals need not be comprised
– Insurance reduces stress during difficult times for the dependents/family members
Would also like to add that in the year 2009/10, AEGON Insurance Company pioneered the revolutionary online Term plan with competitive premium rates, as it was direct interaction between the Company & the customers. It was a trend setter & other Insurance Companies too followed the same. Yes, it’s good to have competition amongst the Companies, but they should equally ensure service is rendered well to the customer, thereby keeping them happy.
As a customer, I was more than happy for the transformation that happened in the Indian insurance industry from the mid-nineties till 2010-11. The knowledge horizon expanded, awareness was there & more importantly the convenience of buying insurance with a click of button, eliminating the agent is truly commendable indeed.
I would like to appreciate the efforts of few people –
- Manish Chauhan, Nandish Desai of JagoInvestor (www.jagoinvestor.com),
- Aditya of FitRichSane (www.fitrichsane.com, https://t.me/fitrichsane),
who have been making efforts to impart financial education to the Indian population, through their respective websites, financial planning services, discussions on their Telegram/WhatsApp groups, Newsarticles so on.
Also, we can find wealth of information related to Personal Finance, money matters on the following websites –
- Rediff Money,
Further, if you want to know about investing, finance & money, reach out to