Eric, age 36, is a single parent and has a 2-year-old son. He earns $65,000 annually...

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.

Solutions

Expert Solution

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 (22001216)	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.

jeff jeffy answered 1 year ago

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