Question

Joetta Hernandez is a single parent with two children and earns ?$37 comma 200 a year. Her? employer's group life insurance policy would pay 2.5 times her salary. She also has ?$49 comma 600 saved in a? 401(k) plan, ?$4 comma 133 in mutual? funds, and a ?$2 comma 480 CD. She wants to purchase term life insurance for 15 years until her youngest child is? self-supporting. She is not concerned about her outstanding? mortgage, as the children would live with her sister in the event of? Joetta's death. Assuming she can receive a 2 percent? after-tax, after-inflation return on insurance? proceeds, use the earnings multiple method to calculate her insurance need. How much more insurance does Joetta need to? buy? What other information would you need to know to use the needs approach to calculate? Joetta's insurance? coverage?

Answer 1

Solution
  Additional Insurance Needs
Calculate Insurance needs,Then Find out the total existing insurance value.Deduct existing insurance value from insurance needs to find out additional insurance to be bought
Earning multiple apporach can used as follows to calculate J's insurance requirement
Life Insurance stream = income stream to be replaced*(1 - percentage of income spent on decreased needs) * earning multiple
Where
J's Income stream = 37200
Percentage of income spent on decreased needs = 26%
Earning multipler for 2% for 15 years = 10.53
J's Life insurance needs = 37200(1 - 0.26)(10.53) = 289897
Existing Benefits
Group Insurance = Gross Salary*2.5
= 37200*2.5 = $ 93000
Additional Insurance required
Additional Insurance needs of J's = Total Insurance Needs - Existing Insurance Benefits
= 289,897 - 93000
= 196,897
The needs approach attempts to determine the funds necessary to meets the needs of the family after the death of primary breadwinner. You can think of the earning multiple as "one size fits all" method and the needs approach as a customized method. It allow you to account for the fact that your family needs may be different from average.
J should consider the following needs to calculate interest coverage ;
Immediate needs at the time of death: Sometimes called as cleanup funds, includes final health costs, burial csts and inheritance taxes
Debt elimination funds: Funds to cover outstanding debt, including credit card and consumer dent, car loans and mortage debt.
Immediate Transtion funds: Funds needed to cover new job training or college degree for surviving spouse and child care during this peroid
Dependency Expense
Spouse life income
Education expense for child
Retirement Income
J's current saving is $ 55,213 will be deducted from total insurance requirement as per needs approach