• The net discount rate adjusted for growth in James Cohen’s future earnings is 0%.
• James will continue working for the next 18 years.
• On his death, James Cohen’s share in the medical practice would be sold and post-tax proceeds would be contributed to the investment portfolio.
Lafferty also collates relevant financial information relating to the Cohens after the birth of their child as shown in Exhibit 1:
Based solely on Lafferty’s assumptions and the data in Exhibit 1, calculate the amount of life insurance needed by the Cohens under the human life value method of replacing James Cohen’s human capital
Human life value method:
$150,000 − $100,000 = $50,000.
Present value of 18 years’ excess income at net discount rate of 0%
= $50,000 × 18 = $900,000 of insurance needed
Why were the 50k not considered pre-tax? i.e. pre-tax, that would be 66,7k, instead of 50. This is to compute the amount of pretax income needed to replace the net after-tax income.