South Carolina Insurance Practice Exam

Which approach predicts a person's earning potential devoted to dependents?

1. Human life value approach

2. Income replacement approach

3. Needs analysis approach

4. Capital needs analysis

The correct answer is: Human life value approach

The human life value approach focuses on estimating the economic value of an individual based on their potential earnings throughout their working life, particularly considering the financial support they provide to dependents. This method incorporates factors such as the individual's age, income, occupation, and the number of years they are expected to work until retirement. By using this approach, one can calculate how much financial loss dependent family members would face should the individual pass away. It emphasizes the importance of protecting the future income that the deceased would have contributed, ensuring that dependents maintain their standard of living despite the loss. This make it particularly relevant for life insurance purposes, as it serves to project the financial implications for dependents based solely on the individual’s earning capacity. The other methods, while related to financial planning, focus on different aspects of insurance and financial needs. For example, the income replacement approach looks at providing a set amount of income to replace lost earnings, rather than the total potential earnings throughout life. The needs analysis approach assesses the immediate needs of the family, and the capital needs analysis evaluates the total amount of capital required to support dependents after an individual's death. Each of these has its unique application in financial planning, but the human life value approach is specifically designed to predict the