Question

In: Accounting

Jamie Lee and Ross were stunned to find that their family of two has grown to...

Jamie Lee and Ross were stunned to find that their family of two has grown to a family of five! They were expecting twins until they found out the day, they were born that they were actually the parents of triplets! Ross immediately had worries of being able to provide for the growing family: diapers, formula, college expenses times three! What if something happened to him or Jamie Lee? How would the surviving parent be able to provide for such a large family?

Current Financial Situation - Income

Jamie Lee: $45,000 gross income ($31,500 net income after taxes)

Ross: $73,000 gross income ($60,800 net income after taxes)

  1. Jamie Lee and Ross need to ensure that the surviving spouse and the children will not have financial hardship in the event of a loss. Using the Easy Method how much life insurance should Ross purchase? How much life insurance should they purchase for Jamie
  2. Ross figures that if he were to die prematurely that Jamie Lee and the family may lose 15 to 20 years of Ross’s salary. Ross also determines that in 17-18 years the family may need $400,000 to educate the triplets. On a needs-based method, if Ross wants to be conservative and cover 15 years of loss salary and educational expenses what would be a reasonable amount of life insurance that he would need to purchase just on his life? What would be the best type of insurance to purchase and why?

Solutions

Expert Solution

A) Easy method:- This is the most simple way of calcualting the life insurance to be purchased. As per this method, Life insurance to be taken is 7 years of 70% Gross salary

Easy method:- Ross Jamie
Gross income $73000 $45000

70% of salary (1)

51100 31500

7yrs of 70%gross income

7 × (1)

357000 220,500

According to Easy method, the amount of insurance to be purchased by Ross and Jamie is $357000 and $220500 respectively

B)Needs based method:- This is the most thorough method of calculating insurance .In this , all the family needs that arise immediate to the death and all the current basic needs are considered and the family's liquid Assets which provide for such needs are deducted in order to attain the insurance amount to be purchased.

Computation of Life insurance as per Family Needs method:

Needs method:- Amount ($)

Basic needs:

15 years salary of Ross

(73000×15)

1,095,000

Long term needs

Education expenses

400,000
Insurance to be purchased $1,495,000

Best type of Insurance:-

Now that there are 3 more members added to the family, the additional living expenses due to the babies has increased and they cannot afford huge amounts of premium.Also as the intention of life insurance requirement is purely for the safety and security of the policy and not investment and corpus at the end , it is recommended that Ross takes a Term Insurance policy of 15 -20 years beacuse the Corpus required at the end of term is huge and they can afford only  to pay premium of lesser amounts .


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