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? (Do NOT worry about Social Security for this example)
Answers
Damon
well, say we have the present value of an annuity. Usually the value goes up at interest rate r but in this case we have only inflation, negative interest (unrealistic of course, presumably your successor would deposit the insurance proceeds in an interest bearing account, hopefully at least 3%.)
Therefore I will use r = -.03
P= 58,000 [ 1 -(1-.03)^-20]/-.03
= 58,000 [ -.83893]/-.03
= 58,000 [ 27.96 ]
= 1,621,932.29
instead of 58,000*20 = 1,160,000
Therefore I will use r = -.03
P= 58,000 [ 1 -(1-.03)^-20]/-.03
= 58,000 [ -.83893]/-.03
= 58,000 [ 27.96 ]
= 1,621,932.29
instead of 58,000*20 = 1,160,000
Damon
By the way, die right away to get the maximum if it stops at age 20. Best make it for 20 years after you die.