Human Life Value (HLV): meaning and formula

The idea

Your ability to earn is the biggest asset your family relies on. If it stopped, the family would need money to cover living costs, children's education and loans for years. HLV puts a number on that need, in today's rupees.

Two ways to calculate it

1. Income method. The present value of your future earnings after deducting your own personal expenses.
2. Needs (expense-replacement) method. The present value of your family's expenses over the years they depend on you, plus debts, minus what is already available. This is what the term insurance calculator uses, because it ties cover to what the family actually needs.

The formula (needs method)

Cover needed = PV of annual family expenses over N years + outstanding loans − existing life cover − liquid assets

where PV = annual expenses × [1 − (1 + r)^−N] ÷ r, r is the discount rate and N the number of years of dependence.

A worked example

• Family's annual expenses: ₹6,00,000
• Years of dependence: 25
• Discount rate: 6%
• Outstanding loans: ₹30,00,000
• Existing life cover: ₹25,00,000
• Liquid assets set aside: ₹10,00,000

PV of expenses = 6,00,000 × [1 − 1.06^−25] ÷ 0.06 = about ₹76.7 lakh. Add loans: ₹76.7 lakh + ₹30 lakh = ₹106.7 lakh. Subtract existing cover and assets (₹35 lakh): additional cover needed ≈ ₹71.7 lakh.

What moves the answer

• Discount rate. A higher rate means a smaller present value; a lower one means more cover. Use a conservative rate.
• Years of dependence. Until children are independent and a spouse can manage, not necessarily until you turn 60.
• Inflation. The method assumes today's expenses. If you want inflation built in, lower the discount rate by the inflation rate.
• Future goals. Add education or marriage costs separately if not included in expenses.

The rule-of-thumb check

Many advisers also quote 10 to 15 times annual income as a quick check. It is simple and often higher than a needs-based number for people with low expenses and many assets, and lower for people with big loans and dependents. Use it as a sanity check, not the answer.

Review the number

Recalculate when you take a loan, have a child, get a big raise or pay off debts. Cover bought at 30 may be too little at 40.