CMFAS RES5 Financial Planning & Calculations question: Using the human life value method

CMFAS RES5Financial Planning & Calculations

A 40-year-old client earns S$60,000 a year after tax and personal expenses and expects to work another 25 years. Using the human life value method with a 4% per annum discount rate (the annuity factor for 25 years at 4% is 15.6221), what is his human life value, to the nearest dollar?

A S$1,500,000
B S$1,000,000
C S$625,000
D S$937,326

Show the answer and explanation

Answer: D. S$937,326

Human life value = annual net income × annuity factor = 60,000 × 15.6221 = S$937,326. This capitalises the present value of the client's future net earnings; discounting reflects that future dollars are worth less than today's.

Common mistake

S$1,500,000 simply multiplies 60,000 × 25 years, ignoring the time value of money; future earnings must be discounted, so the true HLV is well below the undiscounted total.

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Original study material mapped to the public CMFAS RES5 syllabus. Unofficial, not endorsed by MAS or SCI. Verify figures and rules against current guidance before relying on them.