Question description

 

Question 1: (Needs Approach) 
The correct answers are based on the set of facts and tables provided below. All the data you need to perform the necessary calculations are contained in the tables following the three paragraphs below. Show all your calculations so you can receive partial credit even if you make a mistake. The appearance of your homework is a factor in your grade; therefore, it is suggested it be presented in a professional manner (i.e. pretend it is like something you would prepare for your boss).

Pat and Mandy are married and have a son, Steve, age 8. Mandy, age 29, earns $40,000 annually from her job. Pat, age 31, earns $50,000 annually from his job. Assume that Pat will die before Mandy. The family wants to ensure that they have adequate life insurance on Pat to cover their cash and income needs if Pat dies. Hence, they want to determine if they should purchase additional life insurance on Pat to cover these needs using Needs Approach. (you may find some hints from your textbook, page 214)

The tables below provide figures on their: 1) cash needs; 2) present insurance and financial assets; 3) income needs; and 4) income that the family will receive if no additional life insurance is purchased. Use the values in these tables to determine how much, if any, additional life insurance the family should purchase on Pat to cover their needs. In your answer, calculate and show the components of any additional life insurance needed in terms of cash needs and income needs and the total amount of additional life insurance needed.

This exercise assumes that 1) Pat dies immediately; 2) Mandy continues to work if Pat dies. However, her earnings are not enough to meet their needs. So, the figures provided in the table are net of her earnings; 3) Mandy plans to retire at age 65; and 4) the life insurance proceeds are invested at an interest rate equal to the rate of inflation (so, you do not have to worry about time-value of money issues).


Cash Needs: 
Estate Clearance $15,000 
Mortgage Redemption $150,000 
Emergency fund $20,000 
Educational Fund $100,000 

Present Insurance and Financial Assets: 
Whole Life Insurance $150,000 
Investments/Savings $10,000 

Income Needs: 
Readjustment Period $5,000 monthly for 2 years 
Dependency Period $5,000 monthly for 8 years
Blackout Period $3,500 monthly for 28 years 
Mandy's Retirement Period $3,500 monthly for 25 years 

Expected Income from Sources Other than Life Insurance: 
Readjustment Period $3,500 monthly for 2 years 
Dependency Period $3,500 monthly for 8 years 
Blackout Period $3,000 monthly for 28 years 
Mandy's Retirement Period $2,000 monthly for 25 years 



Question 2: (Capital Retention Approach)

Pat estimates that $60,000 is seen as sufficient wealth to meet his family’s needs after his death. Currently, the family has $800,000 total assets, including bank saving, securities investment, house, cars, etc. The family currently has $220,000 total liability (e.g., mortgage payoff, auto loan, credit card balance), $135,000 cash needs (e.g., emergency fund, educational fund, and final expenses), and $145,000 non-income-producing capital. Ignore any other potential capital resources or needs, e.g., Social Security benefits.

Assuming a 5% rate of return, how much life insurance does the Capital Retention Approach suggest? (You may find some hints from your textbook, page 217). Again, please show all your work and calculations so you can receive partial credit even if you make a mistake. The appearance of your homework is a factor in your grade; therefore, it is suggested it be presented in a professional manner.) 

Additional Requirements 

Level of Detail: Show all work