Determining the Amount of Life Insurance Coverage Needed

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The correct answer is A. Multiple of earnings method.

The multiple of earnings method is a common approach to determine the amount of life insurance coverage needed by an individual. It involves multiplying an individual's gross annual earnings by a selected number or factor, which typically ranges from 5 to 20. The resulting figure provides an estimate of the amount of life insurance coverage needed to adequately provide for dependents or beneficiaries in case of the individual's untimely death.

For example, suppose an individual has a gross annual income of $100,000 and selects a factor of 10. The resulting amount of life insurance coverage needed would be $1,000,000 ($100,000 x 10).

While the multiple of earnings method provides a simple way to estimate life insurance needs, it may not be appropriate for everyone. For instance, it may not take into account an individual's unique financial circumstances, such as debts, savings, and investments. Therefore, it is advisable to use this method as a starting point and then adjust the coverage amount based on individual needs and circumstances.

Other life insurance needs analysis methods include the needs analysis method and the capital needs analysis method. The needs analysis method considers an individual's financial obligations, such as debts, funeral expenses, and education costs, and subtracts any available assets or other sources of income to determine the amount of life insurance needed. The capital needs analysis method involves estimating the amount of capital needed to generate a specific income stream for dependents or beneficiaries and then calculating the amount of life insurance needed to provide that capital.

The tax saving method and whole life coverage are not methods used to determine the amount of life insurance coverage needed. The tax saving method involves using life insurance as a tax-advantaged investment vehicle, while whole life coverage is a type of permanent life insurance that provides both a death benefit and a cash value component.