Question

Andrew, who is married and the father of one, is 23 years old and expects to work until 68. He earns $67,500 per year. Andrew expects inflation to be 3% over his working life, and the appropriate risk-free discount rate is 5%. His personal consumption is equal to 25% of her after-tax earnings, and her combined federal and state marginal tax bracket is 15%. What is the amount of life insurance necessary for Andrew using the Human Life Value method?

Answer 1

Answer : Under Human Value Life Method we need to needcto estimate the future value of the earnings after taxes and consumption

Value of Earnng after taxes =[ Before Tax Earning * (1 - Tax rate) ]

= [67500 * (1 - 0.15) ]

= 57375

Value of Earning after Consumption = After Tax Earning * (1 - personal Consumption)

= 57375 * (1 - 0.25)

= 43031.25

Present value of Life Insurance Decision = {Periodic Payment / (rate - Growth rate)} * {1 - [(1 + growth) / (1 + rate)]^number of periods}

= {43031.25 / (0.05 - 0.03)} * {1 - [(1 + 0.03) / (1 + 0.05)^(68 - 23)}

= 2151563.50 * {1 - 0.4208784}

= 1246016.28

Present Value of Life Insurance using Human Value Life Method is 1246016.28