Question

In: Finance

Sam is 25 years old, in good health and was just married to his college sweetheart....

Sam is 25 years old, in good health and was just married to his college sweetheart. he recently began a job with a salary of $60,000. he signed up for term life insurance with his employer for 2 times his salary. Lilly is also employed and makes $40,000 per year. They have no debt or assets but want to buy a house in the near future. Lilly has an $80,000 term life insurance policy that is paid by her employer. what life insurance policy would you recommend for Sam?

A. whole life insurance policy with face value of $120,000. the annual premium for the policy is $1,200.

B. He doesn’t need any additional life insurance since he has a term policy with his work, and they don't have any assets.

C. Purchase a $1,000,000 30-year level term insurance policy. the annual premium for this policy is $1,200.

D. Purchase a $2,000,000 whole life insurance policy. the monthly premium for this policy is $1,800.

Solutions

Expert Solution

Estimating the life insurance that Sam and Lilly would require based on their income using multiple of earnings appraoch since we have limited information.

Using a multiple of 10 = (60,000+40,000) *10 = 1,000,000

Given that Lilly already has been covered of $80,000 by her employer the couple can opt for a cumulative coverage of $1,000,000. A term life insurance will protect against early death and make investments to prepare for a longer life.

Considering above, option:

Option C. Purchase a $1,000,000 30-year level term insurance policy. the annual premium for this policy is $1,200.


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