Washington Life Producer Practice Exam

Which approach predicts a person's earning potential and determines how much of that amount would be devoted to dependents?

1. Life expectancy method

2. Income approach

3. Human life value approach

4. Future value analysis

The correct answer is: Human life value approach

The human life value approach is designed to estimate a person's potential earnings over their working life and assess how much of that income would generally be allocated to support dependents. This method takes into account factors such as the individual's current income, expected career growth, and the economic value they provide through their work. By calculating the total income that the individual would earn over their lifetime and factoring in the portion that contributes to dependents' needs, this approach provides a solid basis for evaluating life insurance coverage and financial planning. It quantifies the financial impact of a person's absence on their beneficiaries, which is essential for ensuring adequate protection and support. In contrast, the other approaches mentioned serve different functions. The life expectancy method focuses on estimating how long an individual is likely to live, while the income approach generally refers to valuing assets based on expected income generation rather than solely on earning potential. Future value analysis is concerned with projecting the value of an investment over time based on expected growth rates, rather than directly addressing income or support for dependents. Thus, the human life value approach is specifically tailored to understanding the financial implications of an individual's earning potential.