Doug and Cheryl have a newborn child and are shopping for life insurance. Doug earns $100,000 a year and Cheryl cares for their child. They have a $300,000 mortgage with 20 years remaining and are concerned if something were to happen to Doug, how their family can manage. If they wish to cover the family expenses until the child turns 20, approximately how much term insurance would they purchase? (Assume the expected annual return is 6%.)

Question

Quizplus · Accepted Answer

To calculate the needed term insurance, consider Doug's annual income replacement and the mortgage payoff. Using the present value of an annuity formula for income replacement (PVA = PMT × [(1 - (1 + r)^-n) / r]), where PMT = $100,000, r = 6% (or 0.06), and n = 20 years, the present value of Doug's income over 20 years at a 6% return is approximately $1,146,992. This accounts for both income replacement and the mortgage payoff, hence option C is correct.

Doug and Cheryl Have a Newborn Child and Are Shopping