Question

Wendy and Frank Kampe, 30 and 35, are considering the purchase of life insurance. Wendy doesn’t have any coverage whereas Frank has a $150,000 group policy at work. The Kampes have two young children, ages 3 and 5. Wendy earns $28,000 annually from a part-time, home-based business. Frank’s annual salary is $55,000. From their income, they save $7,500 annually. The rest goes for expenses. The couple estimates that the children will be financially dependent for another 20 years.

In preparation for a visit with their insurance agent, the Kampes have estimated the following expenses if Frank were to die:

Immediate needs at death	$25,000
Outstand debt (including mortgage payment)	$90,000
Transitional funds for Wendy to expand her business to fully support the family	$15,000
College expenses for their two children	$205,000

They also anticipate, should Frank die, receiving $8,000 a year in Social Security survivor’s benefits until the youngest child turns 18, and $5,000 annually in pension benefits, until Wendy turns 80. Wendy projects her gross annual income to be $40,000 after her business expansion. Once the children are self-supporting, Wendy wants to plan a spousal life income for 10 more years, from age 50 to age 60, plus retirement income for another 20 years from age 60 to age 80. She anticipates receiving a 5 percent after-tax, after-inflation return on their investments.

To date, the Kampes have accumulated a total of $107,000 of assets, not including $45,000 home equity. Their assets include$10,000 considered as an emergency fund, $12,000 of IRA funds for Wendy, $35,000 in other investments, and $50,000 in Frank’s employer 401(K) plan.

Questions:

What could happen to the Kampes’ children if Frank or Wendy should die without adequate life insurance coverage?

Should the Kampes name the children as life insurance beneficiaries?

Which life insurance riders might the Kampes select when purchasing a policy?

Since they will make a concerted effort to become informed about life insurance, should they also purchase life insurance on the children, rather than waiting until later when they would have to reeducate themselves for life insurance shopping?

Answer 1

1. There is a lack of proper insurance coverage for the children for meeting their future expenses. The education expenses will be difficult to be covered with the current savings. The outstanding debt of $90000 will be a great setback for the children.
2. Yes, Kampes should have the life insurance policy with children as beneficiaries. The children will get the insurance amount upon the death of the Kampes.
3. – The premium waiver rider is the rider which allows waiver of outstanding premium when the policyholder dies.

-Death rider is the rider when the beneficiary gets the lump sum amount and the procedure does not trail off in case of unforeseen event.

- It should cover the education up to the age of 20 years.

Various other riders are offered by the insurance companies like accidental benefit, critical illness etc.

4) Kampes may purchase the life insurance on the children. But before buying life insurance on children, they should make sure that they have enough amounts in emergency fund, pension fund, education expenses and various other expenses.