DeShawn is 38 years old and is married with 3 children, ages 2, 4, and 6. He makes $45,000 a year and is planning to retire when he turns 60. From the following three options, DeShawn decides to buy the $900,000 20 year term policy. Given DeShawn's scenario, assess whether DeShawn made a wise decision.
AgeAnnual Life Insurance Premium (per S1000 of face value)
20 -Year TermWhole Life20-Year Endowment
MaleFemaleMalaFemaleMaleFemale
38515.3 S514.8 S522.40520.04530.05529.63
a. DeShawn would be safer buying whole life policy.
b. DeShawn would have more money in the long run if he invested in the 20-year endowment.
c. DeShawn's current policy will cover his family for an adequate period of time at his current salary.
d. DeShawn's current policy has too high of a face value and does not cover his family long enough.
Please select the best answer from the choices provided
Answer (1)
Calculate DeShawn's annual premium: $\frac{900,000}{1000} \times 15.3 = $13770.
Determine the recommended insurance coverage: 5-10 times his $45,000 salary, which is $225,000 - $450,000.
Assess that the $900,000 policy is higher than the recommended range, but the 20-year coverage is adequate.
Conclude that the policy's face value is too high. d
Explanation
Problem Analysis DeShawn is 38 years old, married with 3 children (ages 2, 4, and 6). He earns $45,000 per year and plans to retire at 60. He bought a $900,000 20-year term life insurance policy. We need to assess if DeShawn made a wise decision.
Calculate Annual Premium First, let's calculate DeShawn's annual premium for the $900,000 20-year term policy. According to the table, the annual premium per $1000 of face value for a 38-year-old male is $15.3. Therefore, the annual premium is calculated as follows: 1000 900 , 000 × 15.3 = 13770 So, DeShawn pays $13,770 annually for his life insurance policy.
Assess Face Value Adequacy Next, let's assess the adequacy of the $900,000 face value. A common rule of thumb is to have life insurance coverage of 5-10 times annual salary. In DeShawn's case: 5 × 45 , 000 = 225 , 000 10 × 45 , 000 = 450 , 000 So, his life insurance needs would typically fall between $225,000 and $450,000. The current policy at $900,000 is significantly higher than this range.
Evaluate Coverage Period Now, let's consider the coverage period. The policy covers him for 20 years, until he is 58. He plans to retire at 60. His children are currently 2, 4, and 6. In 20 years, they will be 22, 24, and 26. So the policy covers them until they are adults, which is a reasonable period.
Evaluate Options Given that the face value of $900,000 is much higher than the recommended 5-10 times his annual salary, and the policy covers his children until they are adults, we can evaluate the given options: a. DeShawn would be safer buying whole life policy: This is not necessarily true. Whole life policies are more expensive and may not be the best option for everyone. b. DeShawn would have more money in the long run if he invested in the 20-year endowment: This is also not necessarily true. It depends on the returns he could get from other investments. c. DeShawn's current policy will cover his family for an adequate period of time at his current salary: This is partially true. The coverage period is adequate, but the face value is too high. d. DeShawn's current policy has too high of a face value and does not cover his family long enough: This is the most accurate statement. The face value is too high, but the coverage period is adequate, not insufficient.
Final Answer Based on the analysis, DeShawn's current policy has a face value that is higher than what is typically recommended based on his salary, although it does provide coverage for an adequate period. Therefore, the most accurate answer is: d. DeShawn's current policy has too high of a face value and does not cover his family long enough.
Refine Answer However, since the coverage period is long enough, let's refine the answer. The best answer is that the face value is too high.
Examples
Life insurance helps protect your family's financial future if you pass away. Determining the right amount of coverage involves considering your income, debts, and family's living expenses. For example, if you earn $50,000 a year and want to cover 7 years of income, you might consider a $350,000 policy. This ensures your family can maintain their lifestyle and cover essential costs during a difficult time. Understanding these factors helps you make informed decisions about life insurance.
