Julian,age 45,would Like to Determine How Much Life Insurance to Purchase

question 20

Multiple Choice

Julian,age 45,would like to determine how much life insurance to purchase using the human life value approach.He assumes his average annual earnings over the next 20 years will be $40,000.Of this amount,$20,000 is available annually for the support of his family.Julian will generate this income for 20 more years and he believes that 5 percent is the appropriate interest (discount) rate.The present value of one dollar payable for 20 years at a discount rate of 5 percent is $12.46.What is Julian's human life value?

• A)$184,600
• B)$249,200
• C)$360,800
• D)$400,000

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Definitions:

Perpetuity

An annuity in which payments continue indefinitely, typically at a fixed rate.

Compounded semi-annually

Accumulation method for interest where the interest is applied to the principal twice a year, thereby influencing the total amount of interest earned or paid.

Rate of inflation

The measure of the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling.

Purchasing power

The worth of a currency measured by how many goods or services one unit of it can purchase.