Archive / Investment Adviser (Level 1) / Introduction to the Indian Financial Markets

nism-series-xa-human-life-value-hlv-calculation-formula[ INVESTMENT ADVISER (LEVEL 1) ]

An individual earns ₹15,00,000 annually and spends ₹3,00,000 on personal living costs (leaving ₹12,00,000 for family dependency). If the individual has 25 working years until retirement and the real discount rate is 6.0%, what is the Human Life Value (HLV)?

[ A ]₹3,00,00,000 (Simple undiscounted multiplication: ₹12L * 25 years)

[ B ]₹3,75,00,000 (Gross income * 25 years without deducting personal expenses)

[ C ]₹50,00,000

[ D ]Approximately ₹1,53,40,027 (Present Value of Annuity of ₹12,00,000/year for 25 years at 6.0%)[ CORRECT ]

Takeaway

Option D is correct: Approximately ₹1,53,40,027 (Present Value of Annuity of ₹12,00,000/year for 25 years at 6.0%)

Derivation

Annual family dependency = Income − Personal Expenses = ₹15,00,000 − ₹3,00,000 = ₹12,00,000, since the individual's own living costs would not need replacing after their demise. This stream is discounted as a 25-year annuity at 6.0%: Annuity Factor = [1 − (1.06)^−25] / 0.06 ≈ 12.783356. HLV = ₹12,00,000 × 12.783356 ≈ ₹1,53,40,027. HLV is the theoretically sound basis for sizing term life cover, because it discounts a future income stream to present value rather than just summing undiscounted years — a raw ₹12,00,000 × 25 = ₹3,00,00,000, as in Option A, ignores that money received decades from now is worth far less today.

Why the others fail

A — ₹3,00,00,000 (Simple undiscounted multiplication: ₹12L * 25 years)

Multiplies annual dependency by 25 years without discounting for the time value of money, which overstates the present-day insurance need substantially.

B — ₹3,75,00,000 (Gross income * 25 years without deducting personal expenses)

Uses gross income of ₹15,00,000 without deducting personal living expenses, and still ignores discounting, compounding the overstatement of coverage needed.

C — ₹50,00,000

Does not correspond to any consistent calculation using the given income, expense, tenure, or discount rate figures; it appears to be an arbitrary round number.