Tuesday, 7 May 2013

Do you have right value of Life Insurance? Check.



During my young days,  as young adults we used to take insurance only on endowment policies or ULIP only to the extent of tax planning needs of the year without considering  any financial planning or investment needs.  I never realized that endowment policies and ULIPs covering  a very low sum assured would have put my family in great jeopardy.  Insurance advisors never suggested term or pure insurance which can cover at a very low premium, a very large sum suitable for the family's needs and protection.  I have been fooled into thinking and  linking savings and insurance.  I never got the best of returns also by investing for such a long time through the endowment and ULIP policies.


We may find it difficult to make financial planning involving investments and expenditure decisions,  partly because of the difficulty in assessing our future needs and goals. This is  also because it involves the short-term cost of lowering our personal consumption. For making  such decisions, it is imperative to understand how people’s wealth-management and financial planning needs change over the course of their lives.
            As we face an inability to assess the value of future income and savings which is compounded by the long time  until retirement and the tendency towards event-driven short term  planning, it is common for individuals to stay away from the financial decision-making process. Financial planning models based on promoting products that provide high commissions can lead to short-term planning models based on short sighted decisions that may not be in the best interests of consumers. As a consequence, high providers and insurance advisors tend to view younger customers as less valuable than those who are at retirement, whereas commissions can lead to older customers.
            
 One of the central axioms of a holistic financial planning system  is that it needs to incorporate all material sources of net wealth, tangible and intangible. These include both financial and human capital or simply termed as Humal Life Value.
            
            Human capital or Humal life value represents the value of a person’s future earning potential. It is an intangible asset that typically dominates the personal balance sheet of younger people, whose yield is represented by wage income. We calculate it as the present value of expected after-tax wage earnings as follows: 


Human Capital or Human Life Value
= n Current wage income × (1 + wage growth) × (1 – tax rate) / (1+ discount rate or investment rate)
  i=0
     
                                      

                                           


                                    
          
           
7
            Milliman

            Research Report

            Human capital depends upon a number of factors, including:

A sample work sheet is provided below as table.  Following this link you can work out your own Insurance needs for your family







Source:  Holistic Life-cycle Financial Planning


You may contact us for an assessment and arranging for your actual Life Insurance needs.
Mukundan SN, CFA, CFP
mailto: reliable.planner@gmail.com
Mobile:  9789098720