Patty and Johnny have decided to buy a life insurance policy that would cover a $55,000 cash flow stream for the next 15 years until the kids are out of school.If they feel they can earn 5.5% after taxes and inflation,what are their life insurance needs today?

Question

Quizplus · Accepted Answer

The present value of an annuity formula can be used to find the amount of life insurance needed to cover a cash flow stream. Using a financial calculator or a present value table, the present value of a $55,000 annuity for 15 years at a 5.5% after-tax and inflation rate is calculated to be $552,067. This is the amount of life insurance Patty and Johnny need today to cover the cash flow stream for the next 15 years. Therefore, answer choice B is correct. The other answer choices are either too high or too low.

Patty and Johnny Have Decided to Buy a Life Insurance