Human Life Value Method

CFA Level III
#1

Tying up some final loose ends. I ran into a human life value problem on the CFA site. I noticed this is not covered in the Kaplan material.

Seems like a low probability Q, should I put time into learning this method at this point? Have a good grasp on everything else.

#2

Your status says “CFA Passed Level III.” Might want to change that to Candidate.

In Kaplan’s review questions, they depict human life as: Expected salary - Living expenses. It assumed that both increases at the same interest rate. And discounting to PV using the financial calculator. If it wasn’t assumed to be constant, will involve a bit more calculations.

However, CFAI questions on their website depicts it as (example) from my remembrance…too lazy to look and confirm :

Salary: $100

After tax (30%): $70

Less Living expenses of $20: $50

Add any yearly contribution employer would have put into deceased DC of $50 per year: $100

Divide answer by (1-T%) to calculate before tax salary needed to acrrue per year: $333.33

Calculate:

N = 5 (assumed years to retirement

PYMT = (333.33)

I/Y = Discount Rate

FV = 0

PV : Calculate.

It will depend on how the question is worded which choice you decide to do. However, I do believe (at this stage) it is something that will be easily memorized (paradox to what I said earlier on? hmmm).

Also important to note that Kaplan addressed a Need analysis (similar to human analysis).

This is where you add all current assets [should not include value of house] and less it against PV of spending needs (and ending retirement expenses PV). If assets > than liabilities, then there is no insurance required.

Good Luck! (This was a good review for me to answer this).

#3

Thanks for posting this. Been semi-freaking out today because I put zero time into these calculations.

That said, there’s no “calculate” in the LOS so I highly doubt this shows up.

Cheers

#4

Is this a mistake:

Divide answer by (1-T%) to calculate before tax salary needed to acrrue per year: $333.33

Surely, 100/(1-T%) = 100/0.7 = 142.86

#5

Yup, that is the mistake.

Also make sure to set the calculator for beginning of period payment mode.

The rate should be used (1+discount)/(1+growth rate).

I don’t think it will appear in the AM, probably a PM item set question type

#6

Hey yea, that is a mistake. Thanks for correcting

#7

Yea definitely set to BEG on your calculator as payments are assumed to be paid at this time. Also the rate shouldn’t always the formula you gave. That is only if the situation assumes that there is a growth factor. Which in this case, will be:

{[(1+discount)/(1+growth)] - 1}*100

If not, you carry on as usual.

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