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How
much life insurance a person needs? Or what is the economic value of a human
being? This has been at the core of a life insurance salesman’s dilemma.
Normally the salesman suggests the quantum of cover and often it is accepted.
But the insurance agent does not scientifically evaluate the cover needed and
hence a professional basis has been lacking in life insurance selling. This
is the reason why a person is seldom over-insured and frequently is
under-insured. The lack of a basis for evaluation on the seller’s side and
the lack of basic understanding of the life insurance product on the buyer’s
side create a powerful resonance of under- insurance as a result. However,
with the opening up of the insurance market and with the news trickling in
that many large policies are being sold, gives one the hope that the life
insurance market forces will squarely and scientifically address this
important question and find a fairly correct solution in a professional way.
A
recent report carried in a national economic daily attributes the phenomenon
of selling large life insurance policies to the application of the ‘Human
Life Value’ concept enunciated several decades earlier by Dr S S Heubner who
revolutionised the life insurance industry in the developed world. The sum
and substance of it is, as in the case of insuring a house, or a car or a
possession for its value which is known, it is also possible to evaluate the
value of a human life so that appropriate life insurance cover can be taken
out to protect that value.
The
philosophy of human life value (HLV) concept provides a professional track to
the life insurance industry to move towards expansion and to the buyer a
basis for appraising his own use of the service he gives his family, and to
the salesman a creative concept for his underwriting.
The
idea is simply that a human life has an economic value that is made up of all
the talents, skills and experience of any individual. As property values can
be appraised, capitalised and protected against risk of loss, so can human
life values. This concept is the true economic basis of life insurance.
So
the earning power of an individual which sustains his dependents throughout
his active life is capitalised. It is this productive capacity otherwise
called human life value, which is the economic value to be covered against
loss due to untimely death. When it comes to the quantum of life insurance
cover needed, this concept helps to arrive at the cover to protect that part
of his capitalised future earnings which are exclusively devoted to support
his family (other than himself).
HLV is arrived by using the
following formula
 where E is the average earning
per year made out from remaining earning period, M annual expenses for self
i.e., the life assured, a assumed rate of interest for discount and n assumed
number of remaining earning years.
The
probable productive future lifespan in terms of years depends upon retirement
age, which may vary from a salaried employee, to a businessman to a
professional. The rate of interest at which future earning are discounted
should be reasonable by taking into account the rate of inflation and
expected yields on deposits from life insurance companies.
Once
the human life value of an individual is known he can be persuaded to create
an estate equal to this value, so that in case of death much before his
retirement, his dependents would have undiminished earnings from such an
estate. A life insurance contract ensures this, as it is the ideal instrument
to counter the uncertainties of the future.
A
day is not far of when this concept of ‘Human capital’ will be accepted
everywhere as the basis to calculate the life cover needed for an individual
and then even the present mammoth life insurance figures will pale into
insignificance with the tremendous boost to sales of life insurance policies.
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