Human Life Value
Also written HLV · Human life value method
The present value of the income a person is expected to earn over their remaining working life that is available for dependents — the upper bound on how much life cover is justified.
In plain language
How much life insurance does a person need? The Human Life Value approach answers it by valuing the earner rather than the expenses.
The workbook's definition: the amount of life insurance cover required depends on the economic value that can be attached to human life. HLV is the value insurance needs to compensate for if there is a loss to life, or a disability that reduces the ability to generate income. Technically, it is the present value of the expected income over the working life of the individual that is available for the dependents.
It is deliberately the generous number. Its companion, the needs-based approach, asks a narrower question — what do the dependents actually need? — and the workbook states the relationship between them plainly: the HLV figure will always be higher than or equal to the needs-based figure, as overall expenditure cannot exceed income.
How it works
Only two assumptions. The workbook stresses how few inputs HLV needs: (i) by how much the current income increases — an inflation rate — and (ii) the post-tax return on the sum assured. In its illustration those are 6% and 8%.
The mechanism. The two assumptions are collapsed into one discounting rate:
Adjusted rate = ((1 + post-tax return) / (1 + income growth)) - 1
The income is then discounted over the remaining working years using the PV function, with payments taken at the beginning of each period.
Two results the workbook derives and then tests.
If income growth equals the post-tax return, the discounting rate is zero. Then HLV is simply current income x years left to retirement. The workbook calls this an easy thumb rule to remember, and notes it is the origin of the broader rule that the HLV of younger people is higher — both because more working years remain and because income tends to grow faster early on.
HLV falls as a person ages, other things being equal, because the discount rate stays put while nper falls.
What HLV also covers. The same calculation is prescribed for permanent total disability due to accident and for critical illness cover. The workbook notes both are routinely under-insured because nobody performs the calculation for them.
A worked example
The workbook's own test case. A person aged 33, retiring at 60 — 27 years left — earning Rs 10,00,000 a year, with income assumed to grow 8% a year and the post-tax return on the sum assured also 8%.
Adjusted rate = (1 + 8%) / (1 + 8%) - 1 = 0
nper = 27
PMT = Rs 10,00,000
HLV = 27 x 10,00,000 = Rs 2,70,00,000
This is the workbook's answer to a true/false question, and its point is counter-intuitive: raising the assumed income growth from 6% to 8% makes HLV go up, not down, because the discounting rate collapses to zero.
Now age the same person. At 45, with 15 years left and everything else unchanged, HLV is 15 x 10,00,000 = Rs 1,50,00,000. Twelve years have removed Rs 1.2 crore of insurable value. Nothing about him changed except the number of earning years in front of him.
Against the needs-based figure. Take the workbook's other example — Anil, who needs to replace Rs 9,96,000 a year for 31 years, plus a Rs 40,00,000 loan, less Rs 1.5 crore of existing cover and investments, giving Rs 1,26,43,984 of additional cover. His gross income is Rs 18,00,000 a year, so his HLV is far higher than that Rs 1.26 crore. The gap is exactly what he consumes himself and pays in EMI and premium — money the dependents never see. Hence the rule: HLV >= needs-based, always.
Why NISM asks about it
Chapter 2 (Features of Life Insurance Products), section 2.2 and 2.2.1, with Table 2.1 and two worked true/false questions that are reproduced almost verbatim in the exam. Expect both of them: whether HLV falls when assumed income growth rises (it does not), and whether HLV falls as a person ages (it does). Expect also the comparison question — HLV versus needs-based — whose answer is that HLV is always higher or equal.
Common exam traps
- Higher assumed income growth raises HLV. It lowers the discounting rate. The intuitive answer is wrong and the workbook tests it directly.
- HLV falls with age, because nper falls while the discount rate does not.
- HLV >= needs-based cover, always. Expenditure cannot exceed income, so the needs figure cannot exceed the income figure.
- The needs-based figure falls when the client holds more investments; HLV does not — HLV never deducts existing assets or existing cover.
- Only two assumptions drive it — income growth and post-tax return — which is both its strength and its fragility.
- HLV is not only for death cover. The same calculation is prescribed for permanent total disability and for critical illness, and both are habitually under-insured.
- The discounting rate in the workbook's tables is shown to two decimals while the underlying formula runs to more, so small differences in the final rupee figure are expected.
Check yourself
1.If the assumed rate of increase in income is the same as the post-tax return on investment, what does the Human Life Value equal?
- a)Zero, since the discounting rate is zero
- b)The current income multiplied by the number of years left for retirement
- c)The current income divided by the rate of return
- d)Twice the current annual income
Show the answer
Answer: (b) The current income multiplied by the number of years left for retirement
When the two rates are equal the discounting rate is 0, and the workbook states: where the rate of increase in income is assumed same as the post-tax return on investment, THE HLV WILL ALWAYS BE EQUAL TO THE CURRENT INCOME MULTIPLIED BY THE NUMBER OF YEARS LEFT FOR RETIREMENT. In its example, Rs 10,00,000 × 27 years = Rs 2,70,00,000. This is also the origin of the thumb rule that the HLV of younger people is higher.
Where this is taught
Free preparation for NISM Series X-BRelated terms
- Critical illness insuranceA defined benefit policy that pays a lump sum when the insured is diagnosed with a specified disease such as cancer, heart attack or stroke and survives a minimum period — no payment on death.
- Insurable interestThe requirement that the person seeking insurance would suffer a monetary loss if the subject matter were lost or destroyed — the test that separates insurance from a wager.
- Personal accident insuranceA policy paying a defined sum where the insured sustains bodily injury solely and directly from an accident caused by external, violent and visible means — covering three grades of disablement.
- PV functionThe spreadsheet function that converts a stream of future payments into the single lump sum needed today — the tool the workbook uses to size a retirement corpus and a life insurance cover.
- Term insuranceLife cover for a fixed period: if you die during the term your nominee receives the sum assured, and if you survive it nothing is paid back. It is the cheapest way to buy protection.
- Life insuranceThe product family that covers loss of income: temporary loss from disability and permanent loss from death — the first of the three covers in a household insurance plan.
- Asset protection needThe need to protect assets already built up from theft or destruction — the third of the workbook's three insurance needs, alongside income replacement and income protection.
- Accrued bonusThe bonus a participating investment-cum-insurance policy earns each year after its guaranteed-bonus period ends — declared annually at the insurer's discretion but paid only with the sum assured, at maturity or death.
- Buying insurance for tax savingThe habit of buying life insurance mainly to save tax rather than to meet a genuine protection need — leading many Indians into inadequate cover or poorly performing investment-cum-insurance products.
- Claim settlement ratioThe share of claims an insurer actually paid out of all the claims it received in a year, published by IRDAI — one yardstick for picking an insurer, though not the only one.
- Death coverThe life insurance benefit paid only if the insured dies within the policy's specified period — nothing is paid if the insured survives it, the defining feature of a pure term plan.
- Defined benefit insuranceA policy that pays a pre-fixed sum on the covered event, without trying to measure the actual loss — the opposite of an indemnity policy, and how life insurance itself is structured.
- Keyman insuranceA life insurance policy a company buys on the life of a key executive, paying the premiums and taking the benefit itself — and the one life policy whose proceeds are not exempt under section 10(10D).
- Discounting rate for HLVThe single rate used in the PV formula for Human Life Value — built from the return an investor expects, adjusted for inflation, not either rate on its own.
- Mortgage insuranceA life cover written to reduce alongside an outstanding home loan, so the payout roughly matches what is still owed, though the workbook says it is rarely cheaper than a level term plan.
- Needs-based approachA method of sizing life cover from what a family will actually need, expenses to replace, debts to clear, goals to fund, rather than from a multiple of the client's income.
- Over-insuranceBuying more insurance cover than is actually needed, the workbook's counterpart to under-insurance, imposing unnecessary premium cost rather than leaving risk retained.
- Needs analysis for life insuranceA worked application of the needs-based approach: adding up income replacement, debts and goal corpora, then subtracting existing cover, to find how much more life insurance a client needs.
- Pure riskA risk that carries only the chance of loss or no loss, never a chance of gain — the requirement that separates an insurable risk from a speculative bet such as a stock market investment.
- Income replacement needThe insurance need that arises from a risk to the earning ability of an asset, including a person and their life, met by life, critical illness, accidental disability and annuity products.
- Insurance web aggregatorAn insurance intermediary that maintains a website providing online price comparison and information on the products of different insurers, and other related matters.
- Level premiumA term insurance premium that stays the same every year for the whole of the policy term, as distinct from one that increases as the insured gets older.