When it comes to life insurance, In India, we mostly hear about calculating the insurance requirements using Human Life Value (HLV) method. HLV takes into consideration only the income of the individual. By considering only the income, the HLV method makes multiple assumptions that are not tenable over a long term.
Some of the assumptions are Today’s salary can be used as a reference point for future requirements, emergencies that are non- life threatening (eg: Job loss, Accidents etc) are not considered. Making it more likely to overestimate or underestimate the insurance requirements of the family.
The very purpose of taking an insurance cover is for the family to meet the expenses after the demise of the working member of the family. Need based approach or often termed as Expense replacement considers the expense which the family would require to sustain in the absence of the bread winner. It is also important to understand that the family needs readily available cash to pay off the deceased member’s medical expenses, funeral expenses, debts, estate settlement cost, emergency fund and final expenses. As the inflation rate increases the cost of living also goes up. The family of the demised should be able to sustain in such conditions as well. Hence it would be prudent to link to the insurance requirement of individuals.
Need based approach involves paying off the persons remaining obligations such as auto loan( if the loan is not insured), credit card dues, meeting child’s future education needs, etc. It also takes care of the future expense needs of the deceased’s family. Expense replacement approach is more accurate as it involves in detailed examination of the family’s anticipated expenses during various periods after the insured’s death. It provides more realistic estimates of life insurance needs.
