CMFAS M9 Risk & Life Insurance Fundamentals question: steadily drawn down and completely exhausted by the end of the dependency period

CMFAS M9Risk & Life Insurance Fundamentals

For Mdm Halimah's family, an adviser sizes cover so that the death benefit is steadily drawn down and completely exhausted by the end of the dependency period, leaving nothing at the end. The family needs S$45,000 a year and the children will be dependent for 20 more years. Ignoring investment return, what lump sum does the capital-liquidation approach require?

A S$1,125,000
B S$2,250,000
C S$900,000
D S$45,000

Show the answer and explanation

Answer: C. S$900,000

The capital-liquidation approach spends both capital and any interest over the dependency period, so nothing remains at the end. Ignoring investment return, the fund = annual need x years = 45,000 x 20 = S$900,000. By contrast, capital retention at 4% would need 45,000 / 0.04 = S$1,125,000 because the capital is preserved — liquidation always needs less.

Common mistake

Liquidation consumes the capital, so it needs less than retention; here the fund exhausting to nil means income x years, not income / rate.

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