South Carolina Life and Health Practice Exam

Which approach predicts a person's earning potential to determine how much would be devoted to dependents?

1. Capital needs approach

2. Human life value approach

3. Income replacement approach

4. Financial needs analysis

The correct answer is: Human life value approach

The human life value approach is focused on estimating a person's future earning potential to determine the economic value of their life in the context of financial responsibilities to dependents. This approach takes into account factors such as current income, expected future earnings, and the financial needs of dependents in the event of the person's premature death. Using this approach, an insurance professional assesses how much the individual's future earnings would contribute to the wellbeing of dependents over their lifetime, often considering factors like age, occupation, and income growth. This calculation helps in determining an appropriate amount of life insurance coverage that would provide for the family's financial needs if the insured were no longer present to generate income. While other approaches like the capital needs approach and the income replacement approach also consider financial protection for dependents, they operate under different premises. The capital needs approach focuses more on the total expected costs of dependents' future needs, and the income replacement approach generally addresses how much income would need to be replaced rather than specifically quantifying future earning potential. This understanding positions the human life value approach as a pivotal method in developing financial strategies for safeguarding dependents by projecting the potential income lost due to an untimely demise.