Simple thumb rule or way to measure HLV. Divide the annual income a family would like to have, with the rate of interest that can be earned.
HLV helps to determine how much insurance one should have for full protection. It also tells us the upper limit beyond which life insurance would be speculative
Insurance should be around 10 to 15 times one's annual income.
Mr. Shahul earns Rs. 5,00,000 a year and spends Rs. 30,000 on himself. The net earnings his family would lose in case of his demise is Rs 4,70,000.
Suppose the rate of interest is 8% then the HLV would be 4,70,000 / 0.08 = 5875000. It means that if the Insurance amount Rs 5875000 were to be invested in an 8% income earning asset then the Family would get Rs 4,70,000 every year.
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