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Knowledge At MET

Knowledge At MET

HLV Concept- Based Selling: The Only Panacea for Indian Life Insurance Industry

“Look, if you want to maintain our friendship, please never talk to me about Life Insurance again!” said her friend on the phone when she informed him that she had recently been appointed as the C. E. O. of a newly-formed private sector Insurance Company set up by one of the finest ‘Financial Brands’ of India.

How does yours truly know this? Because, this yours truly, incidentally with 18 years of Life Insurance Industry experience then under his belt, was present in the cabin where this conversation took place on a speaker- phone.

If ‘she’ has to hear this, what about those millions of Insurance Agents (howsoever they may adorn themselves with glorious titles such as ‘Life Advisor’ or ‘Financial Consultant’ or ‘Welfare Planner’ or even ‘Happiness Dispenser’!) who too are subjected to much worse responses and acidic comments than this?

Unique peculiarities of Life Insurance product

Let’s face it at the outset that Life Insurance is a vastly different product from the rest, even in financial world.

It brooks no comparison. Some of the distinguishing features of this product are:

  1. It’s an intangible When a policy is sold, the customer parts with hard cash in return of only a promise (that he will be paid in future, or psychologically still worse, only his heirs will be paid, should anything unfortunate happen to him.)
  1. The very mention of words ‘Life Insurance’ evokes unpleasant memories in the mind of the prospect- death, disability, disease, hospitals, misery, grief, tears & so Not something one would like to discuss or even be reminded about!
  2. Paying insurance premium is a long-term commitment. It’s not a one-time sale. It also means ‘sacrificing the present (parting with money) for the future (security)’.
  3. Unfortunately, most of us have previous negative experiences of dealing with insurance sales-persons. Mis- selling, wrong advice, unsuitable product, no-after- sale-service, being too aggressive – all these impressions from the past encounters cloud the present
  4. No wonder life Insurance selling is regarded as the ‘toughest profession’ in the world. The incredible ‘conversion ratio of ‘25: 5:1’ (to sell one policy, you need to meet five prospects, for which you need to call up twenty-five suspects) deters the probable to join the industry, while it daily dampens the enthusiasm of existing salespersons, resulting in their high attrition. ‘Rejection-handling capability’ emerges as the single- most important ingredient of successful and long-lasting sales Who hasn’t heard of that proverbial insurance salesman who could sell a refrigerator to an Eskimo or a comb to a bald senior citizen?

A Brief History of Insurance

To get the right perspective, it would be worthwhile to throw a quick glance at the journey so far. Some crude sort of Insurance - both Life and General – did exist in the pre-historic times, but the real commercial insurance emerged from Europe in the 17th Century.

It arrived in India in 1818 in form of Oriental Life Insurance Company in Kolkata. Without going into

intricate details, the travel till now can be summarized in 4 phases:

  1. Free market—(1818 to 1938)— mushrooming of several Companies, no worthwhile regulation, plagued by
  2. Regulated Market – (1938 to 1956)— strict regulations for Licencing, fund-management, claims-settlement to protect policyholders’ interests.
  3. Nationalised Market—(1956 to 2000)— Nationalisation of 245 Life Companies to form LIC in 1956 and General Companies to form GIC & 4 subsidiaries in 1972, with complete monopoly.
  4. Open Market—(2000 to till date)— Entry of over 50 Private Insurance Companies, with 26% foreign stake.

The era of privatization can further be classified into phases, characterised by different shades of performance:

  1. 2000-2004: Finding foot-hold, expansion, growth & consolidation
  2. 2004-2008: Boom-period displaying 100% o. y. growth in New Business, Innovative products & increased customer base.
  3. 2008-2012: With the world economic melt-down and fall of stock markets, ULIPs (Unit Linked Insurance Plans) lose their lustre, resulting in huge losses for & dissatisfaction of customers across
  4. 2012-2015: Tightening of regulations, cost-cutting, stream-lining, negative growth-rates. In nutshell, industry in

Review of Private Sector Life Insurance Companies

When the Private Life Insurance Companies entered the Indian market in 2000, they faced a formidable competitor- the giant, monolithic, L. I. C. (Life Insurance Corporation of India) that enjoyed a high Brand Equity and trust of the customer, not only in urban areas, but also in rural. Backed by the ‘guarantee’ from Government of India, this Public Sector Organisation had done a commendable job of insuring millions of lives across the entire nation. The ‘two-hands-protecting–a – burning –lamp’ logo of LIC was (and still is) hardly unknown to anyone.

The major portion of LIC’s business consisted of Endowment type of policies, giving both security and returns to the insured. The most popular product of course was the unique ‘Money back’ policy that gave periodical returns of Sum Assured to policyholder, all the while continuing his life cover. Many other plans were variations of the above two.

Rightly realising that it would take decades to snatch market-share from LIC on its ‘home-turf’, almost all private companies came out with other types of policies to attract the customers – ULIPs (Unit Linked Insurance Plans) being the major cherry.

The ULIP Story

The ULIP Plans caught fancy of the insuring public and quickly become immensely popular. Some Companies had as high as 90% contribution from these Plans. The main reasons for this phenomenon can be summarized as follows:

  1. It was a new, unheard of and unseen
  2. In a conventional Life Insurance Policy, the policyholder has no idea as to how his money is invested to get good Being market-linked investment (with large portion of premium going in for in self-chosen stocks, funds & sectors), they had a high transparency.
  3. Since the Indian Stock Market was doing extremely well during the years 2000 to 2008, the policyholders saw high returns on their investments. And they were pleased with the new baby!
  4. In ULIP Plans, the risk of investment /returns is shared with the policyholder by the Insurance Company. This was very convenient for the Companies for the obvious
  5. The sales force also found these Plans easy to sell because of their novelty, high returns and high commission rates.

So, there was joy all around. But happy days don’t last long. Two disasters were waiting to happen:

  1. The frenzy caused by continuously ascending stock Market Indices resulted in rampant mis-selling by the Sales force, some of them promising the unaware customers returns as high as 30%.
  2. The American economy melt-down in 2008 affected the whole world, including India. The markets crashed Millions of policyholders saw their billions of rupees vanish into thin air. Disgruntled customers expressed their disenchantment in strongest of words.

The image of the entire Life insurance Industry was tarnished. The investor confidence plummeted to unimaginable depths, causing wide-spread turmoil.

Then came the correction. With a succinct comment, “The party is over!”, the IRDA came out with strict guidelines for ULIPs in 2010, putting several restrictions on the Companies- all aimed at enhanced policyholder protection.

But it’s very difficult to restore fractured confidence of the public. People had lost their faith and trust - the very foundation of Insurance Industry –along with their money. It is a tough task to regain the lost glory. Presently, the entire industry, including LIC, is in the process of winning back the customers, once again with traditional Insurance policies. This is where comes in the ‘Human Life Value’ concept.

‘Human Life Value’ Concept

Insurance was invented for the purpose of risk-mitigation and risk-management in the face of uncertainties of life.

As opposed to General Insurance Contracts which are basically for indemnity (if your house worth Rs. 40 lakhs is destroyed totally in a fire and you were wise enough to insure it, the Company will indemnify / compensate you with that amount), Life Insurance Contracts are of a different nature . One can determine the value of a material object loss, but how does once decide the value of a human life?

All human beings generally engage in economic activities to satisfy human needs and wants, aimed at ensuring security. Therefore, economic security has been defined as “the achievement of a feeling of certainty and comfort, sense of fulfilment and mental peace through acquisition, ownership and use of economic goods.”

The essence of insurance lies in sharing of losses and substituting certainty for uncertainty. Life Insurance fundamentally makes good the financial loss suffered by a family by the premature death of an earning family member. But how does one determine ‘the earning capacity’ of a person in view of uncertainties about his longevity and future earnings?

Prof. S. S. Huebner came out with the concept of Human Life Value in the early Twentieth Century. It was indeed a remarkable contribution in the field of economic theory. For the first time, as attempt was being made to ‘capture’ the exact value of a human life.

The Definition of HLV

The Human Life value has been defined quantitatively as the ‘Capitalized Value of the net future earnings of an individual after deducting appropriate costs for self-maintenance.’

In other words, it is the present value of the net total income of an individual which would be lost to the family in the event of his untimely death. This economic loss could be for a family by the death of its bread-winner, as well as for an organization in terms of the value of his services to that organization.

In 1924, S. S. Huebner of Wharton school of Finance and Commerce, University of Pennsylvania, U. S. A., propounded the HLV concept as the ‘economic foundation of Life Insurance.’ This concept has five vital aspects:

  1. Appraisal and capitalization of the Human Life Value
  2. Recognition of family as an Economic Unit –organized around Human Life Value
  3. HLV and its protection as the main link between the present generation and the succeeding generations
  4. Recognition of HLV as Creator of Property Values
  5. Application of Scientific Principles of Business Management to Life

Further, the Human Life Values can be lost on account of:

  1. Premature death
  2. Total and permanent disability
  3. Temporary disability
  4. Unemployment
  5. Retirement

This loss can be capitalized and indemnified only through life and health insurance. By guaranteeing this capitalized value in case if his death, life insurance tries to perpetuate his earning capacity for the benefit of his dependents.

Put simply, “A man may die; but his income should not.” Thus, life insurance acts as a hedge against such a loss. It’s the only scientific method that will help the dependents of an unfortunate ‘departee’ to maintain their life-style even in his physical absence, and obviously his ‘economic’ absence.

Let’s Take an Example

Estimating a person’s HLV involves determination of four quantitative factors:

  1. Estimation of the individual’s anticipated annual earnings net of taxes
  2. Determination of the amount of his expected future annual personal maintenance expenses
  3. Estimating the working life expectancy of that individual
  4. Selection and application of an Appropriate Capitalization Rate

To illustrate further, Mr. XYZ, aged 35, earning a gross income of Rs. 2,00,000/- p.a. today, will retire at the age of 65. Out of his monthly salary of Rs. 16.666/-, he uses Rs. 4,666/- per month for income Tax and his other personal expenses. So, his net annual income is Rs. 1,44,000/-

Assuming a 10% growth in his income every year, he would have a net earning of Rs. 2,36,87,051/- in the next 30 years till his retirement.

The present value of his net earnings, discounted at the rate of 8% (usually the current Bank interest rate) is Rs. 23,54,492/-

If he doesn’t return home today, his family will lose this amount forever. Therefore, Mr. XYZ’s Human Life value =23.55 lakhs.

[Though one of the assumptions in the above simplified example is rather unrealistic – unchanged future maintenance cost – the above example should suffice to explain this complex economic concept even to a layman].

In common language, he must have a policy that covers his life for this amount.

To anyone who hears this explanation for the first time, it arrives as a ‘bolt from the blue.’ Many insured people – who otherwise are firmly ensconced in their ‘comfort zone (throne?!’) of ‘being- completely- insured ‘mental make-up –are rudely awakened to realize the woeful inadequacy of their insurance cover. Tragically, most people have bought their insurance policies, not for risk cover, but for incidental reasons such as I. T. relief, savings, salesman-pressure or being misled.

It is obvious that no caring and sensible individual with a family can sleep peacefully after learning about his actual HLV. Whether rich or middle-class or poor, hardly anyone in India is ‘adequately insured’ to the full extent of his HLV. (On the contrary, there are many ‘multiple policy owners’ who actually feel that they are over-insured! Didn’t anyone ever tell them the famous aphorism: ‘No widow in the world has ever complained that her husband was over-insured!’)

Very few salespersons in India sell Life Insurance as Life Insurance. Out of 2.4 million Agents of LIC & all the 24 private companies, only a handful of them use the HLV in selling and convincing the clients. India is not only a highly uninsured nation, but also highly under –insured populace.

In the developed countries, enlightened customers always buy life insurance basically for covering the risk. As a result, they buy only Term or Whole Life Insurance policies, whose premium is much lower than the Endowment/ Money Back types of policies. (This also answers the question of those who say that they want to cover their full HLV, but don’t have enough money to pay the premium.) In other words, they separate the two worlds- insurance and investment.

No wonder that despite 58 years of LIC’s and 15 years of private insurance companies’ operations in India, the percentage of Insurance penetration (measured as the ratio of premium to GDP) in our country remains abysmally low, as evidenced in the following chart:

Insurance Penetration


U. S. A.

South Africa




6.3 %

7.5 %

15.4 %

3.0 %

5.9 %

3.9 %

Recommendations for the Way Out

(Source: IRDA)

  1. IRDA- the controlling body of the Insurance Industry –has not done much in the arena of the ‘D’ (Development)

in its name. It should start several initiatives- such as public seminars, articles, advertisements, lectures, T.

  1. programmes –to educate the Indian public about the HLV concept and its importance in our life.
  2. Enhanced commission rates for Term/ Whole life policies would certainly give a boost to their
  3. Insurance Companies must include HLV concept as part of their initial and ongoing Training programme for the sales
  4. HLV concept should be introduced at an early stage in schools and colleges as part of the
  5. The Government could offer special Tax-reliefs for such HLV based

A Peep into the Future India

In view of the extraordinary demographic dividend, untapped insurance potential and unfulfilled demand for infra-structure & consumption, several analysts project that India will be the largest economy in the world by 2045.

Even institutions such as Goldman Sachs (‘India could be 40 times bigger by 2050’) and Citi (‘India will overtake China & U. S. A. by 2050’) have reposed their faith in the glorious future that awaits India.

The World Economic Forum forecasts that India could be a world leader in Insurance by 2030.

Having said that, it must also be acknowledged that there are several road-blocks in this path such as illiteracy, poverty, poor infra-structure, low policy-reforms, corruption and a variety of other related issues.

But the fact still remains that insurance industry will play a very crucial role in this economic resurgence of India. The passing of insurance Bill by the Parliament today (12/03/2015) allowing to raise the foreign equity from 26% to 49% is likely to bring in Rs. 62000 crore in India, giving a further boost to the industry. It would not be an exaggeration to say that the engine of Indian economy is driven mainly on the fuel (in the form of premium collected) provided by insurance industry. And the only way to augment this supply would be to use the HLV –concept- based selling, thus collecting huge premium and spreading the security of life Insurance in the far and wide corners of the country.


Human beings are the only one on planet Earth who are aware about their mortality. Strangely enough, we

mortals also believe in our immortality. Hence the reluctance to buy life insurance.

We all KNOW that someday we’ll die, but we don’t FEEL that WE will die. Therefore, we all NEED insurance, but we don’t WANT to buy insurance. Hence, insurance is always SOLD, and never BOUGHT. That is the dichotomy of life - and life insurance. Howsoever difficult and unpleasant the selling of Life Insurance may be, it has to be done –to ensure economic security, emotional stability and human dignity. In today’s materialistic world, we seem to be attaching economic value to every other thing except the most important of them all

– the human life.

It is high time that human life is sanctified through the sacred profession of Life Insurance based on the hallowed concept of Human Life Value.


  1. Economics of Life Insurance - S. S. Huebner, Economics of Life Insurance, Publisher: New York, Appleton,Published in: 1944
  2. HLV and Life Insurance – S. R. Rao & Apparao Machiraju 1988
  3. Tryst with Trust – the LIC story – Kumar by LIC 1986
  4. 9 Sales Concepts – Arun Patil -- By Kotak Life Insurance 2004
  5. An International Reinsurance Hub- Why India needs it?- M. C. Report -- 2013
  6. ‘Yogakshema’ magazine –August 2000- I. C.
  7. R. D. A. website
  8. The Economic Times- 03.2015 & 13.03.2015 -- The future of Insurance
  9. Insurance – Principles & Practice –M. N. Mishra, Publisher: Chand & Company Ltd. Published in: 2011


Authored by: 

Prof. Arun Patil 

Assistant Professor

MET Institute of Management, Mumbai

Tags: MET Institute of Management