Question

1. Joetta Hernandez is a single parent with two children and earns $36,000 a year. Her​ employer's group life insurance policy would pay 2.5 times her salary. She also has $48,000

saved in a​ 401(k) plan, $4,000 in mutual​ funds, and a $2,400 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?

Assuming she can receive a 2 percent​ after-tax, after-inflation return on insurance proceeds and using the earnings multiple​ method, Joetta's insurance need is ​$_______ (round to the nearest dollar)

Answer 1

Given Details in the questions:

Salary per year=$36000

The group life insurance policy=2.5 times the salary

401(k) plan=$48000

Mutual funds:$4000

CD=$2400

Term life insurance to be purchased for 15 years

Interest=2% after tax

Solution:

Multiple earnings method is one of the simplest method of estimating the client's total need. The main aim of this method is to replace the primary source of income for a pre determined number of years.

This method is calculated by using the annual income of clients along with the number of years they want to support.

The only disadvantage of this method is that it does not take into consideration the specific needs of the individual, incomes and investments of the individual.

The Formula to calculate the Multiple earnings method =Annual income*PVIFA

Multiple earnings method=

Multiple earnings method=

Multiple earnings method=36000*12.8493

Multiple earnings method=$462574.8000

The Joetta's total insurance need is $462574.80