Alice and Tommy have 3 dependent children.Alice earns $125,000 per year.They are taking out insurance on Alice for the next 30 years.Tommy expects to get a 9.25% rate of return on the life insurance payoff.Using the earnings multiple approach calculate how much life insurance they need to take out on Alice.

Question

Quizplus · Accepted Answer

We can use the following formula to calculate the life insurance needed:

Life Insurance = (Earnings Multiple) x (Annual Income)

The earnings multiple can be calculated using the following formula:

Earnings Multiple = (1 - (1 + r)^-n) / r

where r is the expected rate of return and n is the number of years.

Plugging in the numbers, we get:

Earnings Multiple = (1 - (1 + 0.0925)^-30) / 0.0925
Earnings Multiple = 8.320

Then, we can calculate the life insurance needed:

Life Insurance = 8.320 x $125,000
Life Insurance = $1,040,000

Therefore, the best choice is B, $1,005,011, which is the closest option to the calculated life insurance needed.

Alice and Tommy Have 3 Dependent Children