Cover Calculations and Buying Checklists
Human life value (HLV) calculation for term insurance: a step-by-step worked example
Work out your human life value for term insurance in India using income, personal spending, salary growth and a discount rate, with the formula and a sensitivity table.
Human life value (HLV) is the present value of the income you would bring to your family over the rest of your working life, after tax and after what you spend on yourself. For term insurance, it answers the question: "What lump sum, invested today, would replace what my family would have received from me?" The calculation needs five inputs: your yearly contribution to the family, the years until retirement, expected salary growth, a discount rate (the return the family could earn), and existing assets and cover to subtract. In the worked example below, a 32-year-old contributing ₹10 lakh a year has an HLV of about ₹2.04 crore, and a reasonable term cover of about ₹1.8 crore after existing savings.
This guide belongs to the cover amount guide, which also explains the simpler expense method.
The inputs
| Input | Meaning | Example (illustrative) |
|---|---|---|
| Take-home income | Yearly income after income tax and your own provident fund contribution | ₹13,00,000 |
| Personal consumption | What you spend on yourself: commute, phone, clothes, personal costs | ₹3,00,000 |
| Yearly contribution (C) | Take-home minus personal consumption | ₹10,00,000 |
| Years to retirement (n) | From now until you stop earning | 60 − 32 = 28 |
| Salary growth (g) | Average yearly growth of the contribution | 6% |
| Discount rate (r) | Return the family could earn on the lump sum | 8% |
The formula
The contribution grows each year, and each future year's money is worth less today. The present value of a growing series of yearly amounts is:
HLV = C × [1 − ((1 + g) ÷ (1 + r))ⁿ] ÷ (r − g)
This assumes the first contribution is received at the end of the first year and that r is greater than g. If r equals g, the formula becomes simply C × n ÷ (1 + r).
Working it through
- Growth relative to discount: 1.06 ÷ 1.08 = 0.98148.
- Raise to the power of 28 years: 0.98148²⁸ ≈ 0.5925.
- Subtract from 1: 1 − 0.5925 = 0.4075.
- Divide by (r − g) = 0.08 − 0.06 = 0.02: 0.4075 ÷ 0.02 ≈ 20.37.
- Multiply by C: 20.37 × ₹10,00,000 ≈ ₹2.04 crore.
So the family's future income from you is worth about ₹2.04 crore in today's money, under these assumptions.
From HLV to the cover you buy
| Step | Amount |
|---|---|
| Human life value | ₹2,04,00,000 |
| Less: existing life cover you own (an old endowment policy) | ₹10,00,000 |
| Less: savings and investments the family could use | ₹15,00,000 |
| Additional term cover suggested | ₹1,79,00,000 |
Should you add your home loan to HLV? Usually not, because the EMIs are paid out of the contribution you counted. If the loan is large compared with income and you want it cleared immediately so the family has no EMI, add the loan balance and check that you are not double counting. Employer group cover is usually not subtracted, because it stops when you leave the job.
How sensitive is HLV to the assumptions?
Small changes in growth and discount rate move the answer a lot. All rows use C = ₹10 lakh.
| Scenario | Years | Growth | Discount | HLV |
|---|---|---|---|---|
| Base case | 28 | 6% | 8% | about ₹2.04 crore |
| Lower return for the family | 28 | 6% | 7% | about ₹2.31 crore |
| Cautious: lower growth, higher return | 28 | 5% | 9% | about ₹1.62 crore |
| No salary growth | 28 | 0% | 8% | about ₹1.11 crore |
| Starting at 40 instead of 32 | 20 | 6% | 8% | about ₹1.56 crore |
Two lessons from the table:
- The gap between growth and discount (r − g) matters more than either number. Use a discount rate your family could realistically earn on safe investments after tax, not an optimistic equity return.
- HLV falls as you get older because fewer earning years remain. Your cover need usually falls too, which is why a term plan ending at 60 is often enough, and why some people layer two policies: a larger one ending when children are independent and a smaller one to 60 or 65.
HLV vs the expense method
| Human life value | Expense method | |
|---|---|---|
| Starts from | Your income | Your family's spending |
| Best for | Younger earners with rising incomes | Families with clear budgets and goals |
| Weakness | Sensitive to growth and discount assumptions | May miss goals or underestimate future spending |
| Typical use | Upper bound of sensible cover | Minimum needed to keep the family's lifestyle |
If both methods give similar results, you have a robust figure. If HLV is much higher, the family's lifestyle may be lower than your income could support, and the expense figure is a reasonable minimum. You can test the expense figure in the life cover calculator, then compare term quotes for the result.
Mistakes in HLV calculations
- Using gross salary instead of take-home after tax.
- Forgetting to remove personal consumption, which inflates the result.
- Using a discount rate of 12% or more because markets have done well: this shrinks HLV and leaves the family under-covered.
- Assuming retirement at 70 when your job or health may not allow it.
- Not revisiting HLV after a big promotion or a career change.
Online HLV calculators on insurers' websites use their own assumptions. Look at the inputs they assume before trusting the figure. Insurers also cap cover by income and age, so the HLV figure can exceed what you are allowed to buy; see the premium factors guide.
If your HLV falls steeply with age, a two-policy layered structure can match cover to the need; the policy term and payout options guide works through an example.
Frequently asked questions
Is HLV used by insurers to decide my cover?
Insurers use income-based limits that work in a similar spirit, but their own underwriting rules decide the maximum cover. Your HLV is a planning figure for you.
What if I am self-employed with uneven income?
Use an average of the last three years of income from your returns, and a cautious growth rate. Add business loans that you have personally guaranteed.
Should I include future bonuses and increments?
Use the growth rate for increments. Include variable pay only if it is reliable, or use a lower growth rate.
Sources
- IRDAI — consumer education on life insurance and choosing cover
- Reserve Bank of India — inflation and interest rate data for choosing realistic assumptions
- Income Tax e-filing portal — your income tax returns and AIS, as income evidence for underwriting
