# Human Life Method - tax rate for life insurance proceeds

I think I understood how to almost calculate the needed insurance based on the human life method.

However, I am confused about a step. Towards the end, we estimate the amount of pre-tax income needed to replace that income on an after-tax basis by using the tax rate for life insurance proceeds.
I didn’t conceptually get the logic of this step. Why are we calculating the pre-tax income? Arent life insurance proceeds tax free?

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Not necessarily. Hence, the tax rate on life insurance proceeds.

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I know I am probably going to ask something stupid now, but are we adding this tax rate to calculate the amount we need for the insurance? I mean at the end the amount taxed go to the government, so why is it relevant to the calculation?

You need, let’s say, USD\ 500,000 net (after taxes) from the life insurance. If the tax rate on life insurance is 18%, then you need \frac{USD\ 500,000}{1 - 18\%} = USD\ 609,756 as the face value of the policy. You’ll receive the payout of USD\ 609,756, pay 18\% of that (= USD\ 109,756) in taxes, and be left with USD\ 500,000 net.

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