William, age 45, would like to determine how much life insurance to purchase using the human life value approach. He assumes his average annual earnings over the next 20 years will be $80,000. Of this amount, $40,000 is available annually for the support of his family. William will generate this income for 20 more years and he believes that 5 percent is the appropriate interest (discount) rate. The present value of one dollar payable for 20 years at a discount rate of 5 percent is $12.46. What is William's human life value?

Question

Mireya Solomon

Business

23 August, 12:14

William, age 45, would like to determine how much life insurance to purchase using the human life value approach. He assumes his average annual earnings over the next 20 years will be $80,000. Of this amount, $40,000 is available annually for the support of his family. William will generate this income for 20 more years and he believes that 5 percent is the appropriate interest (discount) rate. The present value of one dollar payable for 20 years at a discount rate of 5 percent is $12.46. What is William's human life value?

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Answers (1)

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Karlie Moran · Answer 1

William's human life value is $498,400

Explanation:

Given

Time = 20 years

Average Earnings = $80,000

Family Support = $40,000

Dollar Value = $12.46

To calculate a human life value, it is very important to deduct the Income tax costs from a person's average annual earnings.

Since William doesn't have any outstanding loan;

His Human Life value is calculated as follows;

HLV = (Annual Earnings - Family Support) * Dollar Value

HLV = ($80,000 - $40,000) * 12.46

HLV = $40,000 * 12.46

HLV = $498,400