Question

1. Under the Capital Retention (Preservation) method, how much life insurance coverage does an individual need if the survivors’ desired annual income is $85,000, the expected annual income from invested assets is $15,000, the expected annual Social Security income is $20,000 and the life insurance proceeds can earn an 8% rate of return?

Answer 1

         Survivours desired annual income ................................................    $ 85,000

Less: Expected annual income from invested assets ............................. ( $ 15,000 )

Less: Expected annual social security income ..................................... ( $ 20,000 )

         Shortfall in desired annual income ..............................................   $ 50,000

The above shortfall to be covered through the insurance proceeds that can earn an return @ 8% annually

Hence, life insurance coverage required to cover shortfall:

Shortfall desired annual income = Life insurance proceeds (at maturity) X rate of return %

$ 50,000 = Life insurance proceeds X 8%

Hence, Life insurance procceds = $50,000 X 100/8

                                               = $ 6,25,000