Sally brings home $50,000 a year to help provide financial support to her family,comprised of her husband and two children.She is considering purchasing life insurance.Using the earnings multiple approach,how much coverage should she purchase using a discount rate of 5% to replace 10 years of earnings?

Question

Quizplus · Accepted Answer

The earnings multiple approach recommends multiplying Sally's annual earnings by the number of years of financial support needed (in this case, 10 years) and then adjusting for any factors such as inflation and discount rates.

Using the formula: Coverage = (annual earnings x number of years of financial support) / (1 + discount rate)^number of years of financial support

Plugging in the values:
Coverage = (50,000 x 10) / (1 + 0.05)^10
Coverage = 386,000

Therefore, Sally should purchase $386,000 of life insurance coverage using the earnings multiple approach with a discount rate of 5% to replace 10 years of earnings. The correct answer is B.

Sally Brings Home $50,000 a Year to Help Provide Financial