How much life insurance should Stan Moneymaker buy if he wan

How much life insurance should Stan Money-maker buy if he wants to leave enough money to his family so that thet get $25,000 per year for ever in consant dollars as of the year of his death? The interest rate from the life insurance compnay is 7% per year while the inflation rate is expected to be 4% per year. The first payment occurs one year after Stan\'s death.

Solution

The actual effective rate the family will be getting is = (0.07-0.04)/1.04 = 0.03/1.04 = 2.88%

To calculate P, n = (capitalized cost)

P = 25000/2.88% = 866,667 or $866,000 (rounded)