In practice problem 16-23 for the EOCs for Reading 12 (available at CFA website) capital available is listed $1,000,000 consisting of cash $900,000 and life insurance of $100,000. In 22 we are supposed to calculate total and the answer is Total economic wealth = Human capital + Financial capital = $2,900,000 + $900,000 = $3,800,000. Hence, the only include the cash in financial capital and not the life insurance.
Why is the value of the life insurance not included?
Anybody who knows the answer to this?
I didn’t do this question, but I guess it’s because he won’t benefit from the life insurance policy. The policy will be paid out to his heirs when he dies. He cannot spend it or invest it.
Is the $100,000 the payoff (i.e., face value) of the life insurance, or the cash value?
If it’s not the cash value, it’s worthless to the insured.
I feel complex too.
Life insurance is included as Financial Capital when Question 17, however, in question 22, it’s been excluded. Any idea?
Question 17 is about how much life insurance one would need to purchase to make up for his death. In this case, you would subtract the life insurance you’ve already purchased from that amount.
Question 22 is about a person’s net wealth, where only the cash value of insurance is applicable.
Thank you, I see.
As it’s a term/temporary life insurance there is no cash value associated; however, cash value should have been included in cash and investments if any.
thank you who those who asked and answered. life saver