Discount Rate: This variable refers to the interest rate used when determining the present value of future income inflows. A conservative figure for this estimate would be the assumed rate of return on U.S. Treasury bills or notes.
Example:
Consider a client, John, who is 50-year-old and makes $75,000 per year. If John passed away this year, his family will need a life insurance benefit to replace the 17 years of tax adjusted income until retirement. After assuming a 5% discount rate, the present value of John's net income over 17 years is $634,166. Therefore the life insurance benefit needed to replace John's earnings through retirement would be $634,166.
