Very often we hear the term adequate insurance. What exactly does the term “adequate insurance” mean? Long ago Dr. Solomon Huebner developed the concept of Human Life Value (HLV). Dr. Huebner is considered as the father of insurance education. Continue reading after the two coloured boxes below …
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Dr. Huebner’s Concept of adequate insurance
Dr. Huebner stated that to calculate how much insurance an earning person requires, an assessment has to be made of his or her future income in his or her life time. From such income, in the normal course, income tax will be paid and some money will be spent for personal expenses such as transportation to and from work, partying with friends, expenses incurred on personal habits, etc. The HLV of an individual is the future expected income minus the expected tax and personal expenses. The principle is that the family gets the benefit of the income of the spouse only after tax and personal expenses. Tax paid and personal expenses of the spouse are not of much use to the remaining members of the family.
An Simplified Illustration of HLV Calculations
Suppose a person is earning Rs. 1 lakh a month or Rs. 12 lakhs a year. Of this suppose he or she pays income tax of Rs. 2 lakhs. Suppose further that the person spends on self Rs. 2 lakhs a year. The family will get a benefit of Rs. 8 lakhs a year, (Rs.12,00,000 – Rs. 2,00,000 – Rs. 2,00,000). Suppose the person has a working life of 20 years left. Which means that if the person dies today the family will stand to lose Rs. 1.6 crores (Rs. 8 lakhs x 20 years). This person’s insurance cover should be Rs. 1.6 crores, which is adequate insurance. The calculation is however not so simple. A simplified example was given to give a rough idea of the concept of HLV. HLV is scientifically calculated.
Discounting techniques are used to calculate HLV
Since we are talking of future income and future expenses, we are talking of cash flows across time periods, which could stretch from a few years to a few decades. When cash flows across time periods are to be calculated, we use the technique of discounting. Discounting techniques allow us to add, subtract, and compare cash flows across different time periods in today’s money values. In discounting we reduce all future cash flows to today’s (present) value.
Hence Huebner’s HLV can be defined as the net present value (NPV) of the difference between the present value (PV) of expected future income and the present value (PV) of future expenses (represented by the difference between the future income minus the personal expenses and taxes of the bread earner).
HLV is the benefit the family is likely to get from the income of the bread earner during the life time of the bread earner
In simpler terms adequate insurance is the insurance value (sum assured) that is adequate enough to protect the future income that the family would have enjoyed. If insurance cover is adequate, as defined above, the family will not experience a financial loss on the death of the bread earner. While the emotional loss can never be replaced, the financial loss can however be planned for and replaced. Providing adequate insurance is providing an insurance cover that ensures that the family lives in the same manner, and at the same standard of living, had the bread-earner been alive for the rest of his or her earning (productive) life.
The Primary Duty of a Life Insurance Agent
It is the duty of every life insurance agent to sell adequate life insurance to each and every customer. There are many cases of an insurance policy being sold without giving a thought to adequate insurance. While the policy may get sold, the policy holder’s family is not adequately protected. This is the reason that most deaths result in poverty and misery for the family.
Only a Life Insurance Agent can Provide Peace of Mind to the Family
Of all the entire agent population (including mutual funds, shares, chits, post office, etc.) only the life insurance agent can give financial stability to unfortunate families and peace of mind to the policy holder in his or her lifetime. No other broker or agent or adviser is in a position to offer these benefits. It is time for the life insurance agent to take this role seriously and start providing adequate insurance to customers. There can be no deed more noble than this.
Sell life insurance for the risks of dying too early by providing adequate life insurance.
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