ust before his first attempt at bungee jumping, John decides to buy a life insur
ID: 2636684 • Letter: U
Question
ust before his first attempt at bungee jumping, John decides to buy a life insurance policy. His annual income at age 30 is $38,000, so he figures he should get enough insurance to provide his wife and new baby with that amount each year for the next 35 years. If the long-term interest rate is 6.2%, what is the present value of John's future annual earnings? (Round your answer to the nearest cent.) $ Rounding up to the next $50,000, how much life insurance should he buy? (Round your original answer to the nearest $50,000.)
Explanation / Answer
The annuity payments are $38,000 each year and the number of years are 35. The interest rate is 6.2%.
use the excel formula to find the present value of the future annual earnings:
Input the values as:
PMT = -38000
Nper = 35
Rate = 6.2%
PV = (Rate, Nper,PMT, FV)
= (6.2%, 35, -38000, 0)
= $538,252.54
Therefore, the present value of the future earnings is $538,252.54 or $550,000 since we are rounding off that to the next $50,000.
Hence, the amount of life insurance that has to be purchased is $550,000
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