When a child is born, a new life begins.
As he grows, he acquires education, develops skills, which helps him to earn money, get self sufficient.
As time goes, he starts his own family, he has a wife now and may be few kids after some period of time, who depend on him.
Thus, he has a need to provide for them in case of his death.
Life insurance is there to insure this earning capacity, not his life.
Human life value approach :
The economic value of an individual to his dependents in terms of life insurance can be estimated accurately as possible as under :
Estimate person`s average annual earning from future personal efforts. In some instances, the income is obtained on invested funds that have been accumulated or inherited, but in the
overwhelming majority of the cases, the family depends upon the current earnings of the
bread winner.
Deduct income tax, life insurance premium, personal expenses, cost of self maintenance,
etc.
Determine the working expectancy of the individual, i.e. his probable productive working
period. Determine the number of years between the present age and contemplated age of
retirement.
Select a reasonable rate of interest at which future earnings should be discounted, i.e. find
out the present value of the future earnings by discounting it at reasonable rate of interest,
which is generally assumed and payable on the proceeds left with the insurance company.
Multiply the amount of earned income devoted to the family by the present value of Rs. 1
payable annually for the working expectancy, utilizing the rate of interest selected.
Thus, if an individual had an amount of Rs. 248000 to his family today, assuming the rate of interest of 7 %. To the extent possible, this income flow should be capitalized in the form of life insurance policy on the producer of the income, after deducting the capital already created by him during his income earning period.
The moment a person is insured he has knowledge of the potential estate and this is bound to have a salutory effect on this initiative and dynamism on this business plan and thus increase his over all productivity because Life insurance helps to allay one`s worry and fear about uncertainty.
Thus, when one has ADEQUATE life insurance, he can sleep peacefully knowing he has done justice to his responsibilities and in case of his untimely death, his family wont suffer.
