In: Finance
Eric, age 36, is a single parent and has a 2-year-old son. He earns $65,000 annually as a financial advisor. His employer provides group life insurance in an amount equal to the employee's annual salary. Eric also participates in his employer's 401(k) plan. He has the following financial needs and objectives:
Funeral costs and medical bills | $12,000 |
Income support for son | 2,200 monthly for 16 years |
Pay off mortgage | 125,000 |
Pay off car loan | 12,000 |
Pay off credit card debt | 2,000 |
College fund for son | 160,000 |
Eric has the following financial assets:
Checking account | $2,500 |
IRA account | 8,000 |
401(k) plan | 35,000 |
Individual life insurance | 25,000 |
Group life insurance | 65,000 |
The estimated Social Security survivor benefits available to his son are $800 monthly until he reaches the age of 18.
How much additional life insurance, if any, is needed? Assume the rate of return on the policy proceeds is equal to the rate of inflation.
Earnings of Eric until his 2 year old son reaches the age of 18 = $65000 *16 years = $10,40,000
Financial obligations to meet his needs are as follows
Financial Needs | Amount($) |
Funeral costs and Medical needs | 12000 |
Income support for son (2200*12*16) | 4,22,400 |
Payoff mortgage | 125000 |
Payoff car loan | 12000 |
Payoff credit card debt | 2000 |
College fund for son | 1,60,000 |
Total Expenses |
7,33,400 |
Estimated Social security survivor = $800*12*16 = $153600
Therefore Total Expenses he should incur
= $7,33,400 + $1,53,600 = $8,87,000
Total Savings = Total earnings- Total Expenses
=$10,40,000 - $8,87,000
=$1,53,000
This total savings is split into various financial assets
Checking account | 2500 |
IRA account |
8000 |
401(k) plan | 35000 |
Individual life insurance | 25,000 |
Group life insurance | 65000 |
Total | $1,35,500 |
Additional life insurance eric needed to meet his needs =$1,53,000 - $1,35,500
= $17,500
Here assuming rate of return is equal to the rate of inflation
So additional life insurance = $17,500.