Human life value is used to estimate required sum insured

Published in Mint on July 24th 2013, Written by Kapil Mehta

Human Life Value is an estimate of the financial value of a human life.

What does human life value mean and why is it important when it comes to life insurance policies? How is this figure calculated? – Bani Ghosh

Human life value is an estimate of the financial value of a human life. In insurance, this value is used to determine the amount of insurance that a person should buy. Simply expressed the sum insured must equal the human life value. The concept can be misused.

The most common way to assess human life value is to estimate your income each year until you expect to retire, typically 65 years. This income stream then needs to be discounted for inflation and expressed in current terms. The estimation process can be considerably simplified if you assume that your income will increase in line with inflation. Then human life value will be your current income multiplied by the number of years until you turn 65. So, for a 40-year-old the human life value will be 25 times the current income.

I frequently recommend insurance that is 10 times annual income. This is a practical recommendation since most readers have less than 2 times their annual income as insurance. I worry that you may get daunted if I suggest the theoretically correct increase to 25 times. In my view, it is more important that you begin thinking logically about your insurance needs than get paralysed in estimating human life value.

My aunt recently passed away. However, I am not able find her life insurance documents. Is there any way the insurance company can help us? How can we find his policy details and file the claim?
—Sangeeta

It will help if you have any evidence of the life insurance. This could include your aunt’s bank statements showing premium payments. If your aunt bought the insurance through an agent or a bank, they may have kept some records.
If you are not able to find anything then write to the insurer with your aunt’s name, date of birth, death certificate and proof of identity. There will be some back and forth as the insurer will ask details of legal heirs or a judicial authorization so that the information can be shared with you. If you follow through on the paperwork, they will pull out the information from their records and share with you.

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