Question

Sue and Paul are a married couple in their late 40s. After discussing their financial situation with their accountant, financial planner and life insurance agent they have decided that should Paul die, Sue would continue to work until she retires. Sue would also like to have half of their combined income so that she could maintain her current lifestyle. Given that Paul makes $100,000 per year, Sue earns $80,000 per year, and they want their insurance agent to use a rate of return of 5% using the capital retention method, how much coverage will Paul require now?

Answer 1

Paul will require a life insurance coverage of $200,000 to ensure that Sue could maintain half of their combined income after his death, using a 5% rate of return and the capital retention method.

Step-by-step explanation:

To calculate how much life insurance coverage Paul requires, we will use the capital retention method and have Sue maintain half of their combined income using a 5% rate of return. Paul and Sue's combined income is $180,000 per year ($100,000 from Paul and $80,000 from Sue), and Sue wants to have half of this, which is $90,000. Since Sue will continue to earn $80,000, she will need an additional $10,000 from the insurance proceeds.

To provide an annual income of $10,000 at a 5% return rate, the calculation would be $10,000 / 0.05 = $200,000. This means that Paul will need a $200,000 policy to ensure that Sue has half of their combined income maintained after his death.