Question

19 ragav is a single dad who is planning to buy life insurance. after taxes and deductions, his monthly take home pay is $7,770. assuming a 7% annual rate of return, calculate the amount of life insurance ragav should buy using the income replacement approach, without considering the impact of inflation and income taxes.
a. $1,135,100
b. $1,332,000
c. $1,641,500
d. $1,201,500

Explanation:

Step1: Find annual income

Monthly income is $7,770, so annual income is \( 7770\times12 \).
\( 7770\times12 = 93240 \)

Step2: Use income replacement formula

The formula for life insurance using income replacement (with rate of return \( r \)) is \( \text{Insurance Amount} = \frac{\text{Annual Income}}{r} \). Here, \( r = 0.07 \).
So, \( \text{Insurance Amount} = \frac{93240}{0.07} \)

Step3: Calculate the amount

\( \frac{93240}{0.07} = 1332000 \)

Answer:

b. $1,332,000