The concept of Human Life Value is something that we all hear about (especially from the insurance agent!) but do not really know how to calculate. The reason being there is no definitive source of information on the subject. The fact that there is more than one methodology for calculating the HLV makes the subject even more challenging to understand.

The most common definition of HLV is the expected life time earnings of an individual i.e. what is the total income that the individual is expected to earn over the remainder of his working life, expressed in present Rupee terms. For the uninitiated, inflation eats away the value of money; a Rupee today is worth more than a Rupee tomorrow and therefore one needs to suitably 'discount' future earnings to express the value in present Rupee terms.

Our view on how HLV should be calculated is quite different from this. HLV in our view is the monetary value of all the yet-to-be fulfilled needs of the dependents plus all the outstanding liabilities.

Why do we define HLV in this manner (notice that we do not factor in earnings at all)?

Simply because even though expected incomes may not be sufficient to meet the needs, the needs are still there. And an individual strives to meet the needs of his/her dependents. So, the HLV thrown up by our definition is really a "target" that you should have in mind; you can and possibly may have to plan for a lower HLV, but don't despair over that. The important thing is to set a goal for yourself so that your dependents are well taken care of, whether you are there for them or not.

Here's an example to understand this better. Let's calculate the HLV of Vivek, who is married and has a child. In the table all the information about Vivek, his family and their needs is provided. A couple of points from the table need to be explained in more detail.

Particulars
Vivek's age	Years	30
Age of spouse	Years	27
Life expectancy of spouse	Years	70
Age of child	Years	3
Child's share of monthly household expenditure	%	10
Child will remain dependent till	Years	22
Monthly household expenditure	Rs	40,000
Of the above, how much is spent on Vivek	Rs	10,000
Expected inflation in household expenditure	%	5
Money to be set aside for child's education (in present value terms)	Rs	1,000,000
Money to be set aside for child's marriage/other needs (in present value terms)	Rs	750,000
Outstanding loans	Rs	1,500,000
Other liabilities	Rs	500,000
Medical expenditure/emergency fund	Rs	500,000
Rate of return on low risk securities/deposits	%	8
Human Life Value	Rs	16,645,475
If the rate of return on low risk securities/deposits is	%	7
Revised Human Life Value	Rs	18,183,996

First, the value of all yet-to-be fulfilled needs (in present Rupee terms) for Vivek's family is over Rs 16 m. However, it is important to note that this number is really a moving target; as time progresses the needs could change. The biggest impact however would be caused if the standard of living changed; even in the present example most of the HLV attributed to Vivek is due to the income he will need to secure for his spouse in his absence (about 80 per cent).          

Second, the other key components of the HLV are the monies that need to be set aside for education and other needs of Vivek's child. Now, since the child is three years old and still has over 12 years to go to college we will need to estimate the amount of money Vivek needs to provide today so that the future needs of his child are taken care of. If Vivek's child were to go to college today (lets say Engineering, followed by an MBA) he will need to spend about Rs 2 million (Rs 20 lacs) over 5/6 years. Since this need is really 12 years out, Vivek can invest money today in a manner that after accounting for inflation in education expenses, 12 years from now his child has sufficient funds at hand to fund education. By our estimates (10 per cent for inflation in expenses and a rate of return of 15 per cent CAGR -- compounded annual growth rate), Vivek will need to set aside about Rs 1 m (Rs 10 lacs) today. A similar calculation needs to be done for the other needs. We have assumed the money to be set aside for other needs at Rs 750,000.

The other components in terms of outstanding liabilities and loans are actual values as of today.

An assumption has been made that the low risk rate of return is 8 per cent presently. This is a very crucial assumption. A marginal change from 8 per cent to just 7 per cent will increase the HLV by about 9 per cent to over Rs 18 m. While in present times 8 per cent is a rational assumption (Fixed Deposits and some debt mutual funds (close-ended / capital protection) do offer returns much in excess of 8 per cent, on a pre-tax basis; given the tax breaks that are available to Vivek's spouse, the effective return would be about 8 per cent pa), it is certain that going forward this rate is bound to change. And that brings us back to the point that the HLV is not a one time calculation. This is something you must revisit with your financial planner every year to ensure that your family is secured at all times.

To conclude, with respect to the concept of HLV, here are some key points --

One, HLV is a moving target and to make it meaningful, you must review it once a year. Rather than chasing the revised HLV year after year, the aim should be to get the broad trend right with the expectation that in the long-term, the actual and estimate will converge.

Two, do not get overawed by the HLV numbers thrown up. The 'number' is just a starting point and must be put into the context of your present ability to set aside money. In the next article we deal with this in detail.

Three, remain disciplined in the sense that at any point in time you should have planned in such a manner that in your absence, your family will not need to compromise on their yet-to-be fulfilled needs.

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