Question

Jacob is the father of 2 young children. In addition to his current insurance benefits, he wants to ensure that his family has $1,000 per month of income for ten years if he dies. Given this scenario, how much coverage will Jacob need if his life insurance agent uses the capital drawdown method?

A. $100,000
B. $120,000
C. $120,000 plus interest
D. $120,000 plus investment returns

Answer 1

Jacob would need a life insurance coverage of $120,000 plus investment returns to provide his family with $1,000 per month for ten years using the capital drawdown method.

Step-by-step explanation:

Jacob is interested in securing a financial future for his family by providing $1,000 monthly income for ten years should he pass away. Using the capital drawdown method, this means he would need to calculate the total sum of money required to provide this monthly income over the ten-year period.

Jacob needs to ensure a total sum that provides $1,000 for 120 months (10 years x 12 months = 120 months). Multiplying $1,000 by 120 months gives us a coverage of $120,000. However, since he is considering the capital drawdown method, he needs to account for interest or investment returns that would allow the total sum to provide the required income over the specified period.

Therefore, the correct coverage would be $120,000 plus investment returns. This accounts for the fact that the principal amount will generate returns over time, reducing the amount that needs to be drawn down each month to provide the monthly income.