Tarek Framborgia is considering the purchase of a disability policy. He is curre
ID: 462044 • Letter: T
Question
Tarek Framborgia is considering the purchase of a disability policy. He is currently 35 years old and earns $ 50,000 per year as a quality control engineer for a major industrial company. His greatest concern is that with his moderately strenuous job responsibilities and his potential for increasing earnings he be adequately covered should an off-the-job accident keep him from continuing his career. He has come to you with the following list of problems and questions. a. If I purchase a policy that pays a fixed benefit of 90% of my current salary, how long will it be before this amount covers only 70% of my future salary if I assume salary increases of 4% per year? b. Assuming the same policy as above, if I purchase a policy with a provision for future increases of $ 1,000 per year, how long will it cover at least 70% of my income? c. If I assume that both my salary and the inflation rate increase at 4% per year, and that there is no floor or ceiling to my potential benefit increases because I purchase both the COLA
Explanation / Answer
Facts :
1) Tarek Framborgia : 35 year old
2) Earns $ 50000 per year
a)
Policy that will give a benefit of 90 % of Salary
Means
90 % on $ 50000 = $ 45000
70 % of the $ 50000 = $ 35000
Approximately 7 years back.
Means Tarek Framborgia age had to be =28 years (Approximately )
b)
Increase in salary by $ 1000 per year means there in increment of 2 % per year.
That means in above case before 7 years he got 70 % returns for a increment of 4 %.
Now in this there is increment of 2 % means he will get 70 % returns after 14 years from now.
35 + 14 = 49
c)
In this case both increment & inflation rate are same . So Tarek Framborgia savings will remain continue. Because there is no any difference between increment & inflation rate.
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