Question
In: Statistics and Probability
John Wilson 2.John Wilson is a forty-year old computer programmer, husband, and father of four. He...
John Wilson
2.John Wilson is a forty-year old computer programmer, husband, and father of four. He wants to use the capital retention approach to determine how much life insurance he should purchase. Because of his $105,000 salary and the need to care for the family’s four children, his wife does not work outside the home. The family’s current annual living expenses are approximately $75,000, including $8,000 in annual IRA contributions. John prefers to use the capital retention approach (CRA) so that he can be reasonably assured that his family will not exhaust the proceeds of a life insurance policy. However, he also wants to consider the possible reduction in expenses and apply a 70 percent replacement ratio to the calculation.
a.Calculate John’s insurance need using the capital retention approach and an after-tax discount rate of 5.5 percent (assume end-of period payment of benefits).
b.Calculate John’s insurance need using the human life value approach (HLV), an after-tax discount rate of 5.5 percent, and a remaining working life of twenty five years (assume end-of period payment of benefits).
c.After your presentation, John was bewildered about why the HLV and CRA calculations resulted in significantly different insurance needs. Using the two formulas as a guide, explain to John why this result occurred.
Solutions
orchestra answered 2 years agoRelated Solutions
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