Question

Question 2: (Capital Retention Approach) Pat estimates that $60,000 is seen as sufficient wealth to meet his family's needs after his death. Currently, the family has $800,000 total assets, including bank saving, securities investment, house, cars, etc. The family currently has $220,000 total liability (e.g., mortgage payoff, auto loan, credit card balance), $135,000 cash needs (e.g., emergency fund, educational fund, and final expenses), and $145,000 non-income-producing capital. Ignore any other potential capital resources or needs, e.g., Social Security benefits. Assuming a 5% rate of return, how much life insurance does the Capital Retention Approach suggest?

Please show your calculations

Answer 1

Under capital retention approach we need to capitalise the annual requirement of the family after death with current rate of return.

Annual requirement is $60,000

Rate of return is 5%

Life insurance suggested by capital retention approach is 60000/5%

=$1,200,000