Todays Human Life Value Approach to Insurance Planning

Hi friends, i am venkat pursuing my B.tech in pondicherry. I have many sites but i thought this site will be useful for the viewers because the world is towards the online trading and finance and also in Insurance. They are many kinds of illegal trading takes place even many insurance company have been banned. So i thought people should be aware of this because here after my indian peoples should not be cheated in any kind. so i searched for the article about the life of human approaching for insurance planning. At last i found this article written my Mr. Ranjan a famous article writer about the finance condition and about the insurance life in India.


Human Life Value Approach to Insurance Planning 
Written by Ranjan  
Wednesday, 22 September 2010 14:57

The starting point of buying insurance is to decide how much insurance do you need. Human Life Value is an useful approach to get you started.

Huebner (1964) postulated that the optimal sum assured for a working individual should be equal to the displacement cost of his life to his family/dependents. The HLV of a working individual is therefore measured by the discounted present value of expected future earnings over the residual working life minus his own consumption needs. Thus if Et be the expected earnings profile, Ct the own consumption profile, i the rate of interest and w the residual working life,

This idea is undoubtedly appealing and quite naturally there is a vast literature that discusses, refines and prescribes it. Firstly, the idea is borrowed from property insurance and is based on the principle of indemnity. It therefore seems consistent with insurance precepts.

Secondly, it gives a more or less objective and precise yardstick to quantify the sum assured.

Thirdly, it protects the standard of living of survivors, something that every insured is concerned about.

Having said this, it is possible to raise a number of issues on which the HLV approach provides no guidance.

1. Firstly, any individual’s earning and consumption profile would fluctuate from year to year unless he is in a job like government employment where predictability is high. Should the individual change the amount of insurance as the earning/self maintenance undergo a change? For example if he falls ill and his medical hospital expenses increase should he reduce the sum assured as the HLV equation above predicts? Surely no one would do that! On the contrary, he may be induced to increase his insurance!

2. Secondly, as his life progresses and his residual working life diminishes so would his human life value. Should he then go on reducing the amount of life insurance in such a way that on retirement he has no life insurance whatsoever because his HLV is zero? Most customers simply don’t do this.

3. Thirdly, even granting that a customer’s HLV should equal sum assured, the HLV approach gives no guidance with respect to which life insurance policies should the customer buy; term, endowment, money back? We may tacitly suppose that HLV prescribes the pure term assurance plan, it being the cheapest. Yet the fact is that in most countries this plan does a miniscule proportion of business.

4. Fourthly, the HLV approach seems entirely to ignore the fact that customers view life insurance as a vehicle of saving for the future in addition to providing protection. In other words, they attach an opportunity cost to the premiums that they pay. Yet formula (1) considers only the opportunity cost associated with the net income stream of the individual, not the premiums that he pays and the benefits that he receives under the life insurance policies.

To put it in the words of Borch (1977), “ the idea of Huebner has its origin in property insurance, the real problem in this field is not to evaluate property but to decide if the owner should carry some of the risk himself. Clearly this decision will depend on the cost of the insurance cover and calls for an economic analysis. As life insurance is a form of saving it will have to compete with other forms of saving. The growing interest in portfolio theory over the last two decades has brought much attention to insurance. Life insurance policies obviously should have a place in the optimal portfolio. How prominent this place should be will depend on the nature of alternative investments”.

5. Fifthly, and this point is closely related to the point just made, the HLV approach does not consider the payment capacity of the individual. Can he really afford policies whose sum assured equals HLV after meeting other needs? Will insurance companies be willing to write these policies? Although not strictly criticisms of the HLV approach questions like these help to draw attention to the fact that in most societies the actual sum assureds that are brought and sold are much lesser than the human life values.

Therefore, HLV concept must be suitably adjusted :

· To account for notable changes in income & consumption levels

· To sync with reducing working life span.

· To match type of product to specific needs.

· To take into account that buyers often view insurance as an investment product also.

· To suit the payment capacity of the individual.