Question

Use Worksheet 8.1 Katie Holt is a 72-year-old widow who has recently been diagnosed with Alzheimer's disease. She has limited financial assets of her own and has been living with her daughter Laurie for 2 years. Her only income is $850 a month in Social Security survivor's benefits. Laurie wants to make sure her mother will be taken care of if Laurie should die. Laurie, 40, is single and earns $70,000 a year as a human resources manager for a small manufacturing firm. She owns a condo with a current market value of $65,000 and has a $39,000 mortgage. Other debts include a $3,500 auto loan and $500 in various credit card balances. Her 401(k) plan has a current balance of $35,500, and she keeps $4,500 in a money market account for emergencies. After talking with her mother's doctor, Laurie believes that her mother will be able to continue living independently for another 3 years. She estimates that her mother would need about $1,850 a month to cover her living expenses and medical costs during this time. After that, Laurie's mother will probably need nursing home care. Laurie calls several local nursing homes and finds that it will cost about $4,000 a month when her mother enters a nursing home. Her mother's doctor says it is difficult to estimate her mother's life expectancy but indicates that with proper care some Alzheimer's patients can live 10 years after diagnosis. Laurie also estimates that her personal final expenses would be around $13,000, and she'd like to provide a $30,000 contingency fund that would be used to pay a trusted friend to supervise her mother's care if Laurie were no longer alive. Use Worksheet 8.1 to calculate Laurie's total life insurance requirements. In your analysis, assume an incidental special need amount of $13,000.

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Recommend the type of policy she should buy. In your analysis, assume an incidental special need amount of $13,000.

Answer 1

Step1

1. Annual Living Exp & Other Need

		Period 1	Period 2	Period 3
A	Monthly Living Exp	3500	3000	2750
B	Net Yearly income needed	42000	36000	33000
C	No. of year in time period	12	18	22
D	Total living need per time period (b*c)	504000	648000	726000
	Total living Exp.			1878000

2. Special Needs

A. Spouse Edu. Fund                    25,000

b. Children’s College Fund    1,00,000

c. Other Needs                            0

                  

3. Final Exp. (Funeral)                  15000

4. Debt Liquidation

a. House Mortg.                 150,000

b. Other income       5000

c. Total Debt (4a+4b)         155000

Total Financial Resources Needs               2173000

Step 2

1. Income

		Period 1	Period 2	Period 3
A	Annual social Sec.	38400
B	Surviving spouse annual income		35000
C	Other annual pension			27000
D	Annual income	38400	35000	27000
E	No. of year in time period	12	18	22
F	Total period income (d*e)	460800	630000	594000
G	Total Income			1684800

2. Saving & investment 65000
3. Other life insurance   100000

Total financial resources (1g+2+3) :    1849800

Step 3. Additional life insurance needed

Step1. Total financial resources needed         2173000

Step2. Total financial resources available        1849800

Additional life insurance available             323200