Luke is 30 years old and earns an annual salary of $55,000.His wife wants to take out a life insurance policy on him until he turns 67.Using the earnings multiple approach,how large should the face value of his insurance policy be-assuming his wife can earn an annual rate of return of 8.5% on his life insurance pay off?

Question

Quizplus · Accepted Answer

According to the earnings multiple approach, the face value of Luke's insurance policy should be calculated based on his annual salary. The typical range is anywhere from 5-10 times his annual salary, with 7 being a common number.

Using this approach, we can calculate Luke's policy as follows:

Face value = (7 x annual salary) x (1 + rate of return) ^ (years until retirement)

Face value = (7 x $55,000) x (1 + 0.085) ^ (67-30)

Face value = $430,803

Therefore, the best choice is C.

Luke Is 30 Years Old and Earns an Annual Salary