How Much Insurance Do You Need


There is always a question as to how much of Life Insurance is enough. An amount which would take care of one’s loved ones. The concept of Human Life Value provides the answer to this question . How much Life insurance do I need?

Moment Of Truth
It was in cold winter of December in Delhi in the year 2017,I received a call from my very close friend .It was  to help the family of his close relative with insurance claim payment . Sadly, it was a Death Claim payment. The father aged 52 years had died after protracted illness at the hospital. The son was in front of me ,a lad of not more than 20 years.He was carrying all the documents related to the life insurance of his late father. Depressed and almost teary eyed, he pleaded to help him with the claim amount . An early payment would help him to settle certain loan and liabilities.I could make out that the family is under debt and certain liabilities. While leaving ,he did ask me about the likely amount of the claim payment!

I went through the papers and was curious to know how much insurance does the deceased had. I was shocked to find he almost had no insurance. Merely Rs. 5 lakh for a person who was making Rs.30 lakh a year. Also , he had no pension policy. I called the insurance consultant and asked him about the highly inadequate amount of insurance on the life of the deceased . He was defensive and told me that it was with lot of persuasion he could persuade the deceased to insure himself for even this paltry amount. He informed me that the deceased believed investing in real estate and stock market and considered insurance to be bad investment with no sizable returns. Even the wife of the deceased was not very open to insurance.

One fine evening while returning from my office I got a call from the son and during conversation at his own he revealed that the majority of the investment of his late father was in property and a good amount in stock market and presently both are under stress. Though equity would give them cash apart from taking hit on mark to market losses on a few securities, the paper work would delay the process. Further, investment in properties would take good amount of time to realize and would not serve the purpose . He requested that since the family needs immediate cash, the timely payment under life insurance policies would be quite helpful.

I went through the documents again. I found that in all there were 5 policies ,the earliest was of the year 1990 and the latest being 2004 with sum assured ranging from Rs.50,000 to 1 lakh. Finally , I told the son that at the best ,the total payment would be Rs. 7-10 lakh. His face fell and he murmured that it is highly insufficient even to settle the loans taken. Frankly, I do not come across such situation so often and that is very helpful. The son asked me how much insurance does one need. I told him that it is usually 10 to 20 times of the annual income. He was silent for a moment and I knew very well that he was doing some numbers in his mind!

Human Capital

May be 20 times can be treated something very much theoretical, but it does give a sense of how inadequately most of the people are insured. Now, the question is how does one determine the value of insurance cover to be taken.Life Insurance is about securing economic value only. No amount can compensate for the emotional and other losses the family undergoes.This economic value is rooted in the concept of Human capital.What it indicates is the innate production capacity within each individual and their earning potential.The core of the concept is that investments are made in oneself with the expectation of future benefits.Perhaps it is the reason why parents and even working adults invest money and time in good education in India to land up in good colleges and ultimately good companies with decent pay package.

How does life insurance figures out in all this? It was Peter L. Bernstein in his famous book on risk mentioned that despite the world’s enormous wealth, the human capital by far the largest income producing assets for the great majority of the people. Further,Bernstein connects life insurance with human capital by his refrain:”Why else would so many breadwinners spend their hard-earned money on life-insurance premiums?”

Human Life Value(HLV)

Historically, reference is found in Code of Hammurabi which gives semblance of determining the value-Human Life Value. This code was used to determine the compensation allowed to the relative of an individual killed by a third party. The semblance of the concept is also observed in Kautiliya Arthasastra, Manusmriti,Koran, Bible and early Anglo-Saxon law.

The first application of HLV concept to life insurance happened in the year 1880s.Human Life Value is a measure of the future earnings less self maintenance costs such as food, clothing and shelter. If one looks from the view point of one’s dependents, the breadwinner’s HLV is the value of the benefits that the dependent can expect.An organization would look at the value added by the employee to the enterprise as an employee’s Human Life Value to it. In other words, a person may have more than one HLV.

Five Percepts of Human Life Value

In the year 1927,Solomon S.Huebner published a volume titled The Economics of Life Insurance which dealt exclusively with the HLV concept.His five percepts or admonitions regarding HLV which are relevant even today after a century are reproduced as under:
1.The human life value should be carefully appraised and capitalized.The HLV is based on the fact that persons who earn more than is necessary for their self maintenance have a monetary value to those who are dependent upon them. Thus, it is the present value of that part of the earnings of individuals devoted to family dependents and others who benefit from these individual’s earning capacity. Whenever, continuance of a life is economically valuable to others, an economic basis for life and health insurance exists.
2.The human life value should be recognized as creator of property value. HLV is key to turning property into productive force.In other words, the HLV is the cause and property values are the effect.
3.The family is an economic unit organized around the human life values of its members. The family should be organized and managed, and its economic value finally liquidated, in the same manner that other enterprises are organized, operated , and liquidated.
4.The human life value and its protection should be regarded as constituting the principal link between the present and succeeding generations.The realization of the potential net earnings of the breadwinner constitutes the economic foundation for the proper education and development of the children in the event of the breadwinner’s premature death or incapacity and the protection of children against the burden of parent financial support.
5. In view of the significance of human life values relative to property values, principles of business management utilized in connection with property values should be applied to life values.Principles such as appraisal, conservation, indemnity, and depreciation should be applied to the organization, management , and liquidation of human life value. These principles are applied to property values for decades.

One’s HLV is subject to loss through (1) premature death;( 2) illness, injury ,or incapacity; (3) retirement; and (4) unemployment. Any event affecting an individual’s earning capacity has a corresponding impact on her HLV.The probability of loss from death and incapacity is significantly greater than from the other commonly insured perils. In contrast to the loss due to other perils, death peril results in a total loss to the potential estate.The same is true of some health events.
Life Insurance and health insurance make possible the preservation of an individual’s HLV in the face of an uncertain time. The HLV concept provides the philosophical basis for systemizing the insurance purchase decision.


Let us now calculate the economic value of an individual in a simple manner based upon the income of an individual devoted to the family step wise step as follows:
1.Make a good estimate of average annual earning

Determine the percentage of future raise expected.Based upon the percentage of raise expected .calculate the average salary for the working years.. One may also factor in income from investments as well.
2. Out of 1 deduct cost of self maintenance, life insurance premium, income tax and other expenses , etc.
3. Determine the working period of the individual
Deduct the retirement age from the present age..

4.Selection of discounting rate
This rate would determine the present value of the future earnings of the individual.

An individual aged 35 years devotes for an example Rs.6 lakh annually towards various expenses of his family. He wishes to retire by the age of 60 years . The discount rate in the case is 6 percent. The human life value in the case would be around Rs.77 lakh. Simply put, this is the amount of insurance the individual needs on his life. Make a Plan to meet the target amount over the years. Also review economic value  periodically and modify the plan.
The case I mentioned at the beginning, the amount of insurance was highly inadequate. It was not even sufficient to clear the debt.
Lastly, one must insure but fair enough so that it takes good care of loved ones in one’s absence .
In my next writing I would share with you another approach of determining the Human Life Value.