In: Finance
The Jennings Want to Know: How Much Is Enough?
Darrell and Lena Jennings are a two-income couple in their early
30s. They have two children, ages 6 and 3. Darrell's monthly
take-home pay is $3,600, and Lena's is $4,200. The Jennings feel
that, because they're a two-income family, they both should have
adequate life insurance coverage. Accordingly, they are now trying
to decide how much life insurance each one of them
needs.
To begin with, they'd like to set up an education fund for their
children in the amount of $120,000 to provide college funds of
$15,000 a year - in today's dollars - for four years for each
child. Moreover, if either spouse should die, they want the
surviving spouse to have the funds to pay off all outstanding
debts, including the $210,000 mortgage on their house. They
estimate that they have $25,000 in consumer installment loans and
credit cards. They also project that if either of them dies, the
other probably will be left with about $10,000 in final estate and
burial expenses.
Regarding their annual income needs, Darrell and Lena both feel
strongly that each should have enough insurance to replace her or
his respective current income level until the youngest child turns
18 (a period of 15 years). Although neither Darrell nor Lena would
be eligible for Social Security survivor's benefits because they
both intend to continue working, both children would qualify in the
(combined) amount of around $1,800 a month. The Jennings have
accumulated about $75,000 in investments, and they have a
decreasing term life policy on each other in the amount of
$100,000, which could be used to partially pay off the mortgage.
Darrell also has an $80,000 group policy at work and Lena a
$100,000 group policy.
Assume that Darrell's gross annual income is $56,000 and Lena's
is $63,000. Their insurance agent has given them a multiple
earnings table showing that the earnings multiple to replace 75
percent of their lost earnings is 8.4 for Darrell and 7.7 for Lena.
Use this approach to find the amount of life insurance each should
have if they want to replace 75 percent of their lost
earnings.
Life insurance needed by
Darrell: $ ______________
Life insurance needed by Lena: $
_______________
Here earnings multiple calculation will be done.
Life insurance needed by Darell = ($3600*12)*8.4
= $362,880
Life insurance needed by Lena = ($4200*12)*7.7
= $388,080