This blog post will provide insight into how much term life insurance you need and how to approach (and feel confident) making an informed decision about insuring yourself and/or loved ones for the future.
The Human Life Value approach (HLV), or Ideal Life Cover, is the total value that represents the current and future amount associated with day-to-day expenses, long term liabilities, and any investments you may have. When calculating how much term life insurance you need, knowing your HLV is an invaluable way to ensure your dependents have enough money required for the future, in case you die.
Why is Human Life Value important?
HLV puts a value on the important question: what is the price of your life?
When deciding on life insurance, it is important to measure your economic worth. Human Life Value is the dollar value of your economic worth in terms of what you create for the people who depend on you. This is calculated, so that when you die, an amount equivalent to the HLV should be available so that the people dependent on you can lead their life properly.
How to Calculate Human Life Value
There are seven main topics that are taken into account to calculate your HLV, which include:
Capitalized earnings is a methodology in the income valuation method, whichconverts an income stream into an indicator of market value.
Capitalization of earnings is used to determine the value of an organization or business by calculating the worth of its anticipated profits based on current earnings and expected future performance.
Why is Capitalization of Earnings important?
Calculating the Capitalization of earnings helps investors determine the potential risks and return of purchasing a company. This concept can also be applied to individual subsidiaries, product lines, products, and work centers to determine their value for further investment purposes, such as term life insurance.
How to Calculate Capitalization of Earnings
To calculate earnings by the Capitalization of earnings approach, the company takes future earnings and divides them by an expected Capitalization rate. The formula is Net Present Value (NPV) divided by Capitalization rate.
The Capitalization rate is the rate of return an investor can expect on its investment. Higher risk companies, for example specialty pharmacies and Ketamine clinics, and companies relying on equipment, like engineering, that depreciates over time have higher Capitalization rates.
The results of this calculation must be understood in light of the limitations of this method.
The Capitalization of earnings approach requires research and data about the business. Depending on the nature of the business, generalizations and assumptions might be required when calculating the value. The more structured the business is, the less impact any assumptions and generalizations my have.
Startup companies, like our friends at Vested Marketing, often lack large data sets for their financial results. For these reasons, assumptions used in generating a figure for Capitalized earnings for a startup can have a significant impact of the calculation.