Question

2. How much life insurance do you need? Calculating needs - Part1

Jim and Kim Cuttner are 52 years old and have one son, age 14. Jim is the primary earner, making $80,000 per year. Kim does not currently work. The Cuttners have decided to use the needs analysis method to calculate the value of a life insurance policy that would provide for Kim and their son in the event of Jim’s death.

Jim and Kim estimate that while their son is still living at home, monthly living expenses for Kim and their child will be about $3,300 (in current dollars). After their son leaves for college in 4 years, Kim will need a monthly income of $2,750 until she retires at age 65. The Cuttners estimate Kim’s living expenses after 65 will only be $2,300 a month. The life expectancy of a woman Kim’s age is 87 years, so the Cuttner family calculates that Kim will spend about 22 years in retirement.

Using this information, complete the first portion of the needs analysis worksheet to estimate their total living expenses.

Life Insurance Needs Analysis Worksheet

Name of insured	Jim and Kim Cuttner			Date	July 31, 2015
Step 1: Financial resources needed after death
1. Annual living expenses and other needs
		Period 1	Period 2	Period 3
a.	Monthly living expenses	$3,300
b.	Net yearly income needed (1a x 12)
c.	Number of years in time period	4	9	22
d.	Total living needs per time period (1b x 1c)
				Total living expenses (add Line 1d for each period to check your total):	$1,062,600

In addition to these monthly expenses, other future outlays must be accounted for. Before they had a child, Kim worked as a real estate agent, but her knowledge and skills are now somewhat outdated. Therefore, they include $25,000 for Kim to go back to school. Additionally, Jim and Kim want to create a college fund of $30,000 to fund their child’s college education. They estimate that final expenses (funeral costs and estate taxes) will amount to $12,000. Finally, they have taken out a loan for home improvements of $130,000 and an automobile loan of $5,000. They own their home but still have an outstanding mortgage of $300,000.

Using this information, complete the next portion of Step 1 to determine the total financial resources needed.

2. Special needs
a.	Spouse’s education fund
b.	Child’s college fund
c.	Other needs	$0
3.	Final expenses (funeral costs and estate taxes)
4.	Debt liquidation
a.	House mortgage
b.	Other loans
c.	Total debt (4a + 4b)
5.	Other financial needs	$0
	Total financial resources needed (add right-hand column plus the Total Living Expenses you calculated):

Answer 1

Name of insured	Jim and Kim Cuttner			Date	July 31, 2015
Step 1: Financial resources needed after death
1. Annual living expenses and other needs
		Period 1	Period 2	Period 3
a.	Monthly living expenses	$3300	$2750	$2300
b.	Net yearly income needed (1a x 12)	$39600	$33000	$27600
c.	Number of years in time period	4	9	22
d.	Total living needs per time period (1b x 1c)	$158400	$297000	$607200
				Total living expenses (add Line 1d for each period to check your total):	$1,062,600

special needs
a.	Spouse’s education fund	$25000
b.	Child’s college fund	$30000
c.	Other needs	$0
3.	Final expenses (funeral costs and estate taxes)	$12000
4.	Debt liquidation
a.	House mortgage($130,000+300000)	$430000
b.	Other loans	$5000
c.	Total debt (4a + 4b)	$435000
5.	Other financial needs	$0
	Total financial resources needed (add right-hand column plus the Total Living Expenses you calculated):	$1999600