When calculating the human life value method, if the income is provided in post-tax dollars, is that an indication we do not have to gross up the total income?
I took James’ income - annual expenses attributable to James (150 - 100) = 50 then grossed it up using the tax rate provided 80k. The Schweser answer didn’t gross up the amount, so I got the question wrong. There is one example in the CFA curriculum, and they gross it back up.
The question gave after-tax dollars. if it had given pre-tax salary, you would have removed taxes on it. The reason is because you;re to find human life value, and you have to remove the taxes from his salary and his after tax expenses.
I’m not sure what you mean “an indication we do not have to gross up total income”.
The example in the book gives pre-tax salary, so they remove the taxes. The reason they reverse the process to find insurance amount is because the life policy had an assumption of taxes as well, so you have to find how much life insurance is needed accounting for the taxes. So for example, if your human life was $500K and life insurance is taxed at 15%, you would need a policy of $588k.
The question in the Live Mock said death benefit is tax free so the pretax and post-tax is the same – hence no additional calculation is needed. You only need $500K death benefit (from the example I made up).
In real life most jurisdictions, death benefit is income tax free.
Thanks. I guess I overthought it. For a topic with no LOS attached to it, I expected the question to be similarly structured to the book.