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Human Life Value
Can anyone put a price on human life? Is it possible to quantify the value of human life?
Every person in this world is precious and priceless to himself and his family. Trying to quantify the value of human life may sound ridiculous.
But the most important task of an insurer becomes to value human life in terms of money in order to limit the amount of insurance that can be provided to a person. Every person in this world would like to insure themselves for the highest possible limit and it is the job of the insurance company to reduce the limit by that limit and more importantly to protect themselves from the underinsured problems that countries like America have. faced now.
The concept of the value of human life:
Suppose a person buys car insurance worth Rs 100000 (US$ 2500) on a car that is worth Rs 800000 (US$ 20000). The car has an accident and is completely damaged. Even if the insurance company honors his claim in full, he will only get Rs 100,000 ($2,500). Will he be able to buy the same car he had before the accident with this amount? The answer to this question would be ‘No’ because he does not insure his car for its gross value. Simply put, the car was not insured for what it was worth, but underinsured, challenging the “principle of indemnity”.
Insufficient collateral sometimes leaves no trace of collateral if it does not serve the purpose for which it was obtained. In the same way, insurance for human life should be sought keeping in mind the financial loss that the family would suffer in the absence of that person and that should be the amount of insurance. Instead of buying life insurance as a tool for reducing tax obligations, insurance for old age, lower entry into the stock market, etc., it would make sense to look for insurance from the point of view of economic replacement of the value of human life.
The concept of human life value was founded by dr. Solomon S. Huebner, founder of ‘The American College of Life Underwriters’ in the 1920s. The concept of HLV is used by various professionals such as insurance companies, courts, etc. to determine the economic value of human life. For victims of the ‘September 11, 2001 terrorist attack’ on the Twin Towers, courts have determined settlement amounts based on this concept.
Insurance companies use the so-called concept of VALUE OF HUMAN LIFE to calculate the economic value of a person to his family. The amount the family would need to maintain the same standard of living in the person’s absence will be his financial value to the family. Conversely, the financial loss to the family when a person dies is their value to the family. This would be the maximum amount for which a person can claim insurance cover.
Essentially, the value of a human life is based on an individual’s earning capacity. This is the amount the family will lose in his absence. Using the so-called concept of the value of human life, the amount of financial support that a person gives to his family is determined.
Calculating the value of human life requires a detailed analysis of many factors. Some of them are –
1. Annual lifetime income
2. Status of service until retirement
3. Personal expenses
5. Future salary increase etc.
The first step to calculate the value of a human life would be to determine the person’s net annual income after deducting the amount that the person spent on his personal use, such as insurance policy premiums, maintenance expenses, income tax, etc. This amount will be the amount he allocates annually to his family. The economic value of this life again depends on the length of its active earning period. Suppose a person is 25 years old and his annual income after deducting all personal and other expenses is Rs 200,000 (approx. USD 5000). Assuming he continues his current job until he retires at age 55, his income will last the family for another 30 years, provided he survives to retirement. So if he survives till his retirement then the family would get Rs 200,000 for 30 years i.e. 200,000 * 30 = 6,000,000 ($150,000). This will be the amount the family will lose due to his untimely death.
The value thus arrived at would be the logical sum for which a man must insure himself if he wants his family to maintain the same status of residence in his absence. But this again depends on his repayment capacity, i.e. his ability to pay the premium for an insurance policy of Rs 6,00,000 (US$150,000), keeping in mind his current family needs and circumstances.
HLV calculation methods
Method – I: Replacement value of income
This is one of the basic ways to calculate insurance and is based on current annual income.
Insurance needs = annual income * number of years remaining until retirement.
If the annual income is Rs 100000 (US$ 2500) and the age is say 35 years. Assuming that the retirement age is 60 years, the balance of working life is 25 years.
Sum Assured = 100000 * 25 = 25,00,000 lacs ($62500).
Method II: Fixed multiplier
Another way to calculate insurance is to use a fixed annual income multiplier. Multiplier based on the individual’s age.
Age range Multiplier
20 - 30 20
31 - 40 18
41 - 50 15
51 - 60 10
In the above example, the insurance value would be 100000 * 18 = 1800000 lacs ($45000). If the age is say 52 years with an annual income of 4 lacs ($10,000), the insurance value would be 400,000 * 10 = 4000,000 ($100,000).
Human Life Value (HLV)
This way of calculating life insurance is based on the contribution that someone pays and would pay to their family in the event of sudden death.
HLV is therefore defined as the present value of all future revenues. It also includes other fringe benefits less personal expenses, life insurance premiums and taxes.
Let’s see this example for better understanding –
Age of ‘X’: 40 years
Retirement age: 60 years
Current salary: 300000 per year (expected to remain the same)
Personal expenses: 125000
Net contribution to the family: 175,000 (300,000 – 125,000)
Suppose ‘X’ dies at age 40.
Income lost by the family: 175000 * 20 years (60 – 40) * discount rate for 20 years
(Present value factor): 1900000
HLV calculation methods adopted by some leading insurance companies:
ICICI Prudential Life:
HLV is based on:
Financial resources (TA)
% increase in income stream (assuming a fixed internal interest rate)
Existing SA (SA)
Addl SA = CPRO + TL – TA – SA
CPRO – Capital needed to protect lifestyle
MetLife – HLV Calculator:
HLV is based on:
Estimated retirement age
Monthly cost (alone)
Rate of return on investment
Current life insurance
The value of a human life assessed by any of the above procedures LESS the Sum Assured currently in force gives the additional Sum Assured to be taken by a person to provide for his/her future needs and that of his/her family in the event of his/her accidental death.
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