Question 1

b. APPLICATION QUESTIONS a ure death. e purchase eath on the es. b 1. Richard, age 45, is married with two children in high school. He estimates that his average annual earnings over the next 20 years will be $60,000. He estimates that one third of his average annual earn- ings will be used to pay taxes, insurance premiums, and the costs of self-maintenance. The remainder will be used to support his family. Richard wants to calculate his human life value and believes a 6 per- cent discount rate is appropriate. The present value of $1 payable for 20 years at a discount rate of 6 percent is $11.47. Calculate Richard's human life value. human life mining the Fibe the fol- 4. M re th cs of term urance sold Durchase of insurance? of ordinary 2. a. The human life value is one method for estimating the amount of life insurance to own. Keeping all other factors unchanged, explain the effect, if any, of each of the following: 1. The discount rate used to calculate the human life value is increased. 2. The amount of average annual income going to the family is increased. 3. The period over which income is paid to the family is reduced. b. Explain the limitations of the human life value approach as a method for determining the amount of life insurance to own. 3. Kelly, age 35, is a single parent and has a 1-year-old son. She earns $45,000 annually as a marketing ana- lyst. Her employer provides group life insurance in the amount of twice the employee's salary. Kelly also licy develop in 5. To ab va ch purchase of dinary life