**Life Insurance: Human Life Value vs Family Needs**

**Human Life Value** : the amount of life insurance to purchase is the present value of the net future cash flows that Bob could bring to the family.

**1)** 70,000 ||| Start with post tax income **2)** - 20,000 ||| Subtract Bob’s expenses that will cease when he’s dead **3)** + 15,000 ||| Add value of nontaxable employee benefits (healthcare, employee contributions to retirement, etc.) **4)** = 65,000 ||| Total value of Bob’s contributions to the family annually **5)** ÷ (1-20%) ||| Divide by one minus the effective tax rate (of insurance proceeds) to find the pre-tax amount **6)** = 81,250 ||| This is the pre-tax amount of money that Bob brought to the family every year **7)** Assuming a 3% growth rate and 5% discount rate (I/Y=1.94% net compounded), and 20 years of income (N=20), the present value (CPT PV) is $1,362,203, which is the life insurance Bob should purchase.

**Family Needs** : the amount of life insurance to purchase is the amount of money the family will need after Bob’s death

**1)** Estimate the amount of cash needed upon death of Bob. This includes final expenses (funeral and burial) and any taxes payable. Additionally, usually you will pay off any debts, set aside an education fund, and create an emergency fund. Call this **Immediate Cash Needs**.

**2)** Estimate the **present value** of the family’s ongoing living expenses, less the present value of income. Use a relevant growth rate and discount rate. - For example, the surviving spouse may live another 50 years and need 60,000 every year. If her expenses grow at 3% and her discount rate is 5%, then her net I/Y is 1.94% and the PV of her expenses is $1.9 million. - Add the PV of the expenses of the children up until they graduate or can support themselves (usually 22 years old) - Add the PV of transition expenses that may last several years past Bob’s death (eg. car lease) - Subtract the PV of the income of the surviving family members (post-tax) This should add up to the present value of the ongoing living expenses of the family. Call this **Capital Needs**.

**3)** Add **Immediate Cash Needs** to **Capital Needs** to get **Total Financial Needs**

**4)** Add the total assets available to the family (Cash and Savings, PV of retirement accounts, Life insurance, Rental property, etc.). Call this **Capital Available**

**5)** Subtract **Total Financial Needs - Capital Available = Shortfall in Needs**. This shortfall is the amount of life insurance to purchase