Question

Sunita and Rajiv Malik are 38 years old and have one son, age 9. Sunita is the primary earner, making $140,000 per year. Rajiv does not currently work. The Maliks have decided to use the needs analysis method to calculate the value of a life insurance policy that would provide for Rajiv and their son in the event of Sunita’s death.

Sunita and Rajiv estimate that while their son is still living at home, monthly living expenses for Rajiv and their child will be about $4,000 (in current dollars). After their son leaves for college in 9 years, Rajiv will need a monthly income of $3,300 until he retires at age 65. The Maliks estimate Rajiv’s living expenses after 65 will only be $2,900 a month. The life expectancy of a man Rajiv’s age is 82 years, so the Malik family calculates that Rajiv will spend about 17 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	Rajiv and Sunita Malik			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	$4,000
b.	Net yearly income needed (1a x 12)
c.	Number of years in time period	9	18	17
d.	Total living needs per time period (1b x 1c)
				Total living expenses (add Line 1d for each period to check your total):	$1,736,400

In addition to these monthly expenses, other future outlays must be accounted for. Before they had a child, Rajiv worked as a financial consultant, but his knowledge and skills are now somewhat outdated. Therefore, they include $40,000 for Rajiv to go back to school. Additionally, Sunita and Rajiv want to create a college fund of $60,000 to fund their child’s college education. They estimate that final expenses (funeral costs and estate taxes) will amount to $18,000. Finally, they have taken out a loan for home improvements of $150,000 and a credit card balance of $1,800. They own their home but still have an outstanding mortgage of $400,000.

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):

The second half of the needs analysis worksheet is not shown on this page. To complete the worksheet and determine the value of the life insurance policy the Maliks should purchase, they need to factor in additional information.

True or False: The value of Sunita’s employer-offered life insurance policy should be accounted for in the remaining portion of the form.

True

False

Answer 1