Question

Congratulations! Your first baby was born yesterday and is healthy and strong. To guard against your premature death, you want to purchase a life insurance policy that will replace $58,000 of your annual income until your child is 20 years old. How much life insurance should you purchase, if you assume a 3% inflation rate?

and please note what formula you used:

1. future value

2. present value annuity

3. future value payment

or

4.present value

Answer 1

We need to calculate how much amount we need to invest today in insurance policy so that child get $58000 for the time till he turn 20 years old.

Method = Present value annuity

Formula = (1 + r)ⁿ - 1 / r ( 1 +r)ⁿ

Where n = 20 years

R = Rate of inflation.

= (1.20)²⁰ - 1 / 0.20 ( 1.20)²⁰

= 4.870

Total amount of insurance he need to purchase today = ($58000 * 4.870) = $282460