What is the formula for the income replacement approach in life insurance?

The income replacement approach in life insurance focuses on determining the financial amount needed to replace an individual's income for their dependents in the event of their untimely death. This approach aims to ensure that beneficiaries can maintain their standard of living without the deceased's income.

The correct formula is based on calculating the capitalized value of the annual income using the rate of return as a key variable. Specifically, the capitalized value is derived by dividing the annual income by the expected rate of return on investments or savings that the beneficiaries might generate from the insurance payout. This means that if an individual earns a certain amount annually, the capitalized value reflects how much money would need to be invested at a given rate to generate that same amount of income indefinitely.

By using this formula, one can effectively determine how much life insurance coverage is necessary to provide for dependent beneficiaries, ensuring they have ongoing financial support akin to the insured’s income. This calculation is essential in crafting a life insurance policy tailored to replace lost income adequately.

The other options do not correctly represent this approach. While some mention annual income and rates of return, they do not capture the proper relationship between these variables as required for accurately assessing the insurance needed for income replacement.