Joleene is a single parent with two children and earns $45,000 per year.She is purchasing term life insurance for 15 years until her youngest child is self supporting.Assuming her survivors can receive a 3% after-tax,inflation return on insurance proceeds,use the earnings multiple approach to calculate the face value of Joleene's policy.

Question

Quizplus · Accepted Answer

To calculate the face value of the policy using the earnings multiple approach, we need to consider Joleene's income and the number of years the insurance should cover.

First, we need to calculate Joleene's income needs. We assume that her survivors will need 70% of her income after taxes to maintain their current standard of living. So, 0.7 x $45,000 = $31,500 is the annual income need.

Next, we need to calculate the duration of the policy. The coverage should be 15 years until Joleene's youngest child is self-supporting.

Now, we can use the earnings multiple approach formula:

Face value of policy = (Income needs per year ÷ Inflation-adjusted earnings rate) x Years of coverage

In this case: 
- Income needs per year = $31,500
- Inflation-adjusted earnings rate = 1 + inflation rate - after-tax return rate 
- In this case: 1 + 2% - 3% = 0.99 
- Years of coverage = 15

Face value of policy = ($31,500 ÷ 0.99) x 15 = $397,548

Therefore, the best choice is C: $397,548.

Joleene Is a Single Parent with Two Children and Earns