1. Tarek Framborgia is considering the purchase of a disability policy. He is currently thirty-five years old and earns $50,000 per year as a quality control engineer for a major industrial company. His greatest concern is that with his moderately strenuous job responsibilities and his potential for increasing earnings he be adequately covered should an off-the-job accident keep him from continuing his career. He has come to you with the following list of problems and questions.
a. If I purchase a policy that pays a fixed benefit of 90 percent of my current salary, how long will it be before this amount covers only 70 percent of my future salary if I assume salary increases of 4 percent per year?
b. Assuming the same policy as above, if I purchase a policy with a provision for future increases of $1,000 per year, how long will it cover at least 70 percent of my income?
c. If I assume that both my salary and the inflation rate increase at 4% per year, and that there is no floor or ceiling to my potential benefit increases because I purchase both the COLA and future increase option provisions on the above policy, how much should my annual benefit be in twenty-five years?