Congratulations! Your first baby was born yesterday and is healthy and strong. To guard against your...

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

4.present value

Solutions

Expert Solution

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

Rahul Sunny answered 2 years ago

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