How do you calculate life value using the capitalization of income approach?

The capitalization of income approach is a method used to determine the present value of an income stream, which is essential in valuing life insurance. This approach is based on the principle that a stream of income can be valued by dividing the annual income by the capitalization rate, which is typically expressed as an interest rate.

In this context, to calculate the life value using the capitalization of income method, you take the annual income generated from the individual’s earnings or benefits and divide it by the interest rate. This reflects the idea that the expected future income can be used to estimate the value of that income today.

Using the capitalization of income method allows for a straightforward calculation that gives you the present value of future cash flows. For example, if an individual is expected to earn an annual income of $50,000 and the capitalization rate is 5% (or 0.05), you would perform the calculation as follows:

Life Value = Annual Income / Interest Rate

Life Value = $50,000 / 0.05 = $1,000,000

This indicates that the present value of this future income stream is $1,000,000.

The other choices do not represent a correct method for calculating life value in this context. They