Predicting an individual’s future earning potential and determining how much of that amount would be devoted to his dependents incorporates the
A. loss exposure approach.
B. salary projection approach.
C. personal needs approach.
D. human life value approach.
The correct answer and explanation is :
The correct answer is D. human life value approach.
Explanation:
The human life value approach is a method used to predict an individual’s future earning potential and determine how much of that potential would be allocated to supporting dependents. This approach is commonly used in life insurance planning, as it quantifies the economic value of an individual’s life based on their ability to earn income in the future.
The human life value approach focuses on the present value of an individual’s future earnings over the course of their working life. It takes into account factors such as their current salary, potential salary increases, age, and years left in their career. From this, an estimate is made about how much income the individual could generate until retirement, and a portion of that amount is considered to be the financial support that would be required for dependents if the individual were to pass away.
The rationale behind this approach is that an individual’s earning potential is their economic contribution to the household, and in the event of their death, the dependents would likely need to replace that income. The human life value approach provides a quantitative basis for determining the amount of life insurance needed to ensure the dependents can maintain their standard of living.
This method involves estimating both the gross income and the net income after taxes, and often takes into account inflation or potential career advancement. The key advantage of this approach is that it provides a financial figure to guide life insurance coverage, ensuring that dependents are financially protected.
Why the Other Options Are Incorrect:
- A. Loss exposure approach: This method deals with identifying potential financial losses to an individual or business due to risks, but it does not focus on predicting future earnings.
- B. Salary projection approach: This focuses on projecting future salaries but does not specifically consider the financial needs of dependents.
- C. Personal needs approach: This approach considers an individual’s overall financial needs (such as education costs or debt repayment) rather than their future earning potential and its distribution to dependents.
Thus, the human life value approach is the most fitting method for this situation.