PROJECT REPORT

ON
“LIFE INSURANCE USING
HUMAN LIFE APPROACH”

Submitted By : Amarendra Pratap Singh (MBF18001)

Darshana Raj Mathur (MBF18005)
Harshit Lal (MBF18008)
 Human life is a most important asset and life insurance is the most important type of insurance
which provides financial protection to a person and his family at the time of uncertain risks or
damage. Life insurance provides both safety and protection to individuals and also encourages
savings among people. Lic of india plays a vital role in the welfare of human well-being by
providing insurance to millions of people against life risks such as uncertain death or accident.

Life Insurance is a contract between an individual and an insurer, wherein the insurer
guarantees to pay a certain sum of money (sum assured) in case of the insured individual’s
death or at the end of a pre-determined policy term.
Life insurance is an important investment as it works as a safety net for the insured’s family after
his/her demise. Currently, there are 24 life insurance providers in the country with product line-
ups consisting of term plans, endowment plans, ULIPs, etc. The premium rates for insurance
differs between plans and is based on the applicant’s age, income, medical history, sum assured,
and other such factors.

What is Life Insurance?

A life insurance policy is a type of insurance that provides coverage against the unexpected
death of the policyholder or after a set-period of time when the policy matures. In order to avail
this protection, the insured pays a certain amount as premium towards maintaining the policy.
It is nothing but a safety net which provides financial security/protection against loss of life. The
primary purpose of a life insurance policy is to protect the financial interests of the insured’s
family.
There are 3 basic aspects related to life insurance, namely:
 Premium – An individual is accorded cover only if he/she pays a certain sum of money
towards the policy. This is termed the premium. One can consider it to be the initial
investment which offers returns in the future.
 Death Benefit/Sum Assured – This is the money which the insurer assures to pay to the
nominee/beneficiary of the policyholder after his/her demise. This varies based on a number of
parameters.
 Term – Each insurance policy is in affect for a specific period which can be chosen when
purchasing the policy. This is called the term, and it could vary based on the type of policy
chosen.

Life Insurance in India

Approximately 22,500 people lose their lives each day in India. This essentially means that 940
people die each hour. While Life and Death are a parcel of life, the loss of a loved one can leave
a void which might never be filled. A insurance policy helps fill certain aspects of this void,
ensuring that the financial health of the insured’s family is taken care of.
Life Insurance in India has yet to become popular among the masses, with the total insurance
penetration in India being just 3.49% as per the Economic Survey 2018, with life insurance
 accounting for 2.72%. Non-life insurance accounts for 0.77%. Given these numbers it is easy to
understand that a majority of our population is not covered, leaving millions of Indians
unprotected.
Why is Life Insurance Important?
Given the stress associated with our daily life, we often come across cases of people meeting an
untimely end, often leaving entire families shattered after their demise. Here are three main
reasons why one must consider investing in a life insurance plan.
 Financial security – An insurance plan takes care of any financial requirements the
nominee/beneficiary could have. In case of unpaid of loans that the insured might have had,
the policy provides sufficient funds to the nominee to pay it back.
 Additional income – Certain life insurance plans offer an additional source of income to
the insured during his/her lifetime. It helps them meet their long-term financial goals.

Understanding How Life Insurance Works

It isn’t hard to understand how life insurance works, with insurers aiming to simplify the entire
process to generate more interest in this product. The steps below elucidate how exactly life
insurance works.
 Determining one’s need – Before selecting an insurance plan, it is imperative to
determine your financial needs and those of your family. This will help in arriving at an
adequate sum assured.
 Choose the insurer and policy – The next step involves choosing a policy and the right
insurance provider.
 Pay the premium – Once the policy is chosen the individual is expected to pay the
premium amount. In case of regular premium payment policies, the premium should be paid at
the agreed upon frequency.
 Avail the cover – The insured individual is covered for the period chosen by him/her,
subject to payment of the premium.
 On death – In case of demise of the policyholder/life insured during the policy period,
the insurer will pay the sum assured. This amount is paid to the nominee.
 On survival/maturity – On survival of the life insured until maturity, a maturity benefit
might be payable to him/her. This depends on the policy chosen and whether or not it has a
maturity benefit under it.

Types of Life Insurance Policies Available in India

Given the amount of choice in the market, you might find yourself confused when it comes to
deciding which type of life insurance policy you should purchase. Most leading life insurance
firms offer a range of plans including term life plans, whole life plans, endowment plans, money
back plans, ULIPs, etc. to customers. Any one of these policies might be the right choice for you
based on your coverage needs, financial goals, and premium paying ability. A few key types of
policies with their corresponding purpose is mentioned in the table below.
Comparing the type of Life Insurance Plans
Statistics of Life Insurance Companies (2017-18)
LIC continues to be the dominant name in the Indian insurance industry, with private players
lagging behind in terms of premiums collected and lives covered. This, however, is changing,
with a number of individuals opting for private insurers on account of their improved services
and cheaper products.
Life Need Analysis
With IRDA’s new standard proposal form coming in to effect from October 15, 2013, it has
been compulsory for insurance agents, advisers and brokers to carry out a proper need analysis of
policy holders. So, what is insurance need analysis?
Simply put, it is nothing but a method of determining the right product for policy holders and
amount of life insurance which their dependents need in case of death of the policy holder.
To determine the right product for an individual, you need to factor in age, marital status,
number of dependent members, expense, debt, child education and so on. However, determining
an accurate expense after loss of the bread winner of a family is more complex. Here are some
pointers which will help you to overcome this problem.
Rule of thumb: It is the simplest way of determining an insurance need of an individual. There
are three different methods:
Income Rule: In this method insurance need can be calculated simply by multiplying the current
annual income by 6-8. Let us say, a person earns Rs 2 lakh per annum; according to income rule
his insurance need would be Rs 12 lakh to Rs 16 lakh.
Income plus expenses:  Advisers need to find out the liability of policy holders based on his
existing debt, mortgage, college expense of children, children marriage etc. Taking the example
given above, let us assume that the person has total liability of Rs 5 lakh. Now this liability is
added to the earlier insurance need or Rs 12/16 lakh plus liability i.e. equal to Rs 17/21 lakh.
Evaluation of premium: Under this method, the yearly premium is calculated by allocating 6
percent of annual income of an individual and 1 percent in case of dependent members. Staying
with our earlier example where the client has an annual income of Rs. 2 lakh and assuming he
has three dependent members, his annual contribution to insurance would be Rs 18,000 (Rs
12,000 for individual plus Rs 6000 for the three dependent members).
Human Life Value: The basic principal of this method is to provide same lifestyle to the
dependent members as they are maintaining today. The amount of life insurance needed is
calculated in multiples of current earning by the remaining number of years for retirement. In
this method, advisers need to find out individual’s annual income from present age to age of
retirement, annual expenses/commitments and tax-liability. For example: a 35 year old person
earns Rs 3 lakh and his yearly personal expense along with income tax liability is Rs 60000.
Now net disposable income is Rs 2, 40,000 (Rs 3, 00,000 – Rs 60,000).  If the current interest
rate is 8 percent and his retirement age is 65 than net present value (PV) would be nearly Rs 27
lakh. (The PV can be easily calculated in financial calculator or Excel sheet through PV
function)
Human Life value with real rate of return- This method is the same as above but the only thing
added here is consideration of inflation rate. Let us assume that the average inflation for 30 years
is 6 percent. After factoring in inflation, the new PV would be Rs 54 lakh.

Questionnaire (to calculate HLV)

What is the family's Monthly Household Expenditure?
What is the family's Annual Lifestyle Expenditure?
What percent of the monthly household expense is on you?
What percent of the annual lifestyle expense is on you?
What Inflation do you expect on household expenses?
What return do you expect on risk free securities?
How many financial dependents do you have?
What is the Dependent's Current Age?
How many more years will they be dependent on you?
What is the percentage of monthly household expense spent on the dependent?
What is the percentage of annual lifestyle expense spent on the dependent?
Specify Goal Here (graduation / post graduation/ marriage / other)
Specify Goal Here (graduation / post graduation/ marriage / other)
Specify Goal Here (graduation / post graduation/ marriage / other)
Total Monthly Expense on Dependent
Financial Value of your Life to your Dependent
Outstanding Loans
Other Liabilities
Contingency Funds that will be required by the family
Current Life Insurance that the client already has
Assets that the family will be able to financially use in case of clients demise
TOTAL INSURANCE REQUIREMENT
 PROFILE OF INDIVIDUALS
NAME: MR. SUNIL VYAS

CURRENT AGE: 30 YEARS

DEPENDENTS: SPOUSE (27 YEARS) AND CHILD (3 YEARS)

ANTICIPATED AGE OF RETIREMENT: 65 YEARS

SAVINGS: FIXED DEPOSITS 2 LAKHS, OTHER SAVINGS 2 LAKHS

LIABILITIES: OUTSTANDING LOAN 3 LAKHS, HOUSEHOLD EXP. 30000, PERSONAL EXP 10000, EXPECTED
COST FOR CHILD’S EDUCATION 1000000, EXPECTED COST FOR CHILD’S MARRIAGE 750000

ANNUAL INCOME: 15 LAKHS PER ANNUM

Recommendations : ULIP may be a good plan for Mr. Sunil Vyas.

NAME: MR. PRATEEK MATHUR

CURRENT AGE: 45 YEARS

DEPENDENTS: -

ANTICIPATED AGE OF RETIREMENT: 65 YEARS

SAVINGS: FIXED DEPOSITS 2 LAKHS, OTHER SAVINGS 7 LAKHS

LIABILITIES: OUTSTANDING LOAN 15 LAKHS, HOUSEHOLD EXP. 50000,

ANNUAL INCOME: 10 LAKHS PER ANNUM

SUGGESTIONS : Money Back Plan or the Pension/ Annuity plan may be a good deal for Mr. Prateek
Mathur.

Human Life Value Approach to Calculating an Insurance

Need

Assumptions:
Age at Time of Insurance
Purchase: 30
Initial Income: $30,000.00
Number of Years of Working Life: 30
Assume that Income Increases: 3.50%
Discount Rate of Interest [Int.] = 5.00%

Discount
Factor Present Value
Duratio Future
Age n Income at Rate Int. Income
30 1 $30,000.00 0.952380952 $28,571.43
31 2 $31,050.00 0.907029478 $28,163.27
32 3 $32,136.75 0.863837599 $27,760.93
33 4 $33,261.54 0.822702475 $27,364.35
34 5 $34,425.69 0.783526166 $26,973.43
35 6 $35,630.59 0.746215397 $26,588.09
36 7 $36,877.66 0.71068133 $26,208.26
37 8 $38,168.38 0.676839362 $25,833.86
38 9 $39,504.27 0.644608916 $25,464.81
39 10 $40,886.92 0.613913254 $25,101.02
40 11 $42,317.96 0.584679289 $24,742.44
41 12 $43,799.09 0.556837418 $24,388.97
42 13 $45,332.06 0.530321351 $24,040.56
43 14 $46,918.68 0.505067953 $23,697.12
44 15 $48,560.84 0.481017098 $23,358.59
 45 16 $50,260.46 0.458111522 $23,024.90
46 17 $52,019.58 0.436296688 $22,695.97
47 18 $53,840.27 0.415520655 $22,371.74
48 19 $55,724.68 0.395733957 $22,052.15
49 20 $57,675.04 0.376889483 $21,737.12
50 21 $59,693.67 0.358942365 $21,426.59
51 22 $61,782.94 0.341849871 $21,120.49
52 23 $63,945.35 0.325571306 $20,818.77
53 24 $66,183.43 0.31006791 $20,521.36
54 25 $68,499.85 0.295302772 $20,228.20
55 26 $70,897.35 0.281240735 $19,939.22
56 27 $73,378.76 0.267848319 $19,654.38
57 28 $75,947.01 0.255093637 $19,373.60
58 29 $78,605.16 0.242946321 $19,096.83
59 30 $81,356.34 0.231377449 $18,824.02
60 31 $84,203.81 0.220359475 $18,555.11
61 32 $87,150.94 0.209866167 $18,290.03
62 33 $90,201.23 0.19987254 $18,028.75
63 34 $93,358.27 0.1903548 $17,771.19
64 35 $96,625.81 0.181290285 $17,517.32
$100,007.7
65 36 1 0.172657415 $17,267.07
Current Life Insurance Need: $808,571.95

CONCLUSION

It is , of course, difficult to place monetary value on a human being’s life. However, cold and
uncaring it may seem, insurers must be able to do it. In order to accomplish this unemotional
task they use specifically devised mathematical formulations. The net value of a person’s future
earning potential is used to access the human life value for insurance purposes.

Using the Human Life Value Approach, the value of a person’s life is calculated on the net future
earning potential and may be determined by discounting a person’s net future earnings at a
reasonable rate of interest.

However, the approach is controversial because it does not figure in inflation, wage increases
or improved standards of living. It has been largely and widely replaced by more practical
Needs Approach.