Question

How much term life insurance should you have to provide your family with $75,000 per year pretax for general expenses for 40 years, plus immediately pre-fund two $100,000 college accounts for your two children in the event of your death. Assume your death benefit could be invested at 6% per year for the entire period.

Answer 1

Solution:

Step 1: Requirement is $75000 per year plus $200000/- now. So, how much amount we should have now to get these benefit if allowed to invest at 6% interest .

Step 2: So, in other way we can see this like, if we invest x (say) amount of $ now to get the cash flow $75000 per year till 40th year and $200000 now, we will find present value of $75000 per year for 40th year

so we have, x=75000 PVAF(6%,40years)+200000

Therefore x= 75000*15.0463+200000=$1328472.5   

Note: Here i have calculated the amount PV of 75000 for 40th year discounted @6% by short cut formula. You can also find out the amount by following formula i.e.

Present Value= PMT [{1-1/(1+i)n}/i]   

Where PMT = Annuity per Year i.e. $75000, n= no. of years i.e. 40years, i= rate if interest i.e 6%