Question

Your first baby was born yesterday and is healthy and strong. To guard against your premature death, you want to purchase a life insurance policy that will replace $58,000 of your annual income until your child is 20 years old. How much life insurance should you purchase, if you assume a 3% inflation rate

Answer 1

Answer:

assuming the  interest rate is = 15% the  life insurance should you should purchase = $497854.0773

Explanation:

Given that :

Annual income receipt = $58000

Assumption:

If we assume that the inflation rate π = 3% = 0.03

Also , let assume that the interest rate is = 15%  = 0.15 since it is not given too

Then the effective interest rate = $\dfrac{ (i-\pi)}{(1+\pi)}$

the effective interest rate = $\dfrac{ (0.15-0.03)}{(1+0.03)}$

the effective interest rate = $\dfrac{ (0.12)}{(1.03)}$

the effective interest rate = 0.1165

the effective interest rate = 11.65%

Since n = $\infty$

The Principal amount of how much life insurance should you purchase is;

= Annual income receipt/the effective interest rate

= $58000/ 0.1165

= $497854.0773