Question

Joetta Hernandez is a single parent with two children and earns $55,100 a year. Her​ employer's group life insurance policy would pay 2.5 times her salary. She also has $73,467 saved in a​ 401(k) plan, ​$6,122 in mutual​ funds, and a $3,673 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 3 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 :- Current insurance value = 55100 * 2.50

= $ 137750.

Total needed insurance = 55100 * (1 - 0.26) * 11.94

= 55100 * 0.74 * 11.94

= $ 486841.56

(Note :- Cumulative present value factors for 15 years at 3 percent using present value factor table = 11.94)

Accordingly, additional insurance needed to buy by Joetta = 486841.56 - 137750

= $ 349091.56 (Rounded off to $ 349092)

Conclusion :- Additional insurance needed to buy by Joetta = $ 349092 (approx).

Other information required for calculating insurance coverage of Joetta include the education expenses of children of Joetta, expenses of family of Joetta, loans etc. of Joetta..