1 The Johnsons Change Their Life Insurance Coverage Harry and Belinda Johnson spend $20 per month on life insurance in the form of a premium on a $10,000, paid-at-65 cash-value policy on Harry that his parents bought for him years ago. Belinda has a group term insurance policy from her employer with a face amount of $200,000. By choosing a group life insurance plan from his menu of employee benefits, Harry now has $100,000 of group term life insurance. Harry and Belinda have decided that, because they have no children, they could reduce their life insurance needs by protecting one anothers income for only four years, assuming the survivor would be able to fend for himself or herself after that time. They also realize that their savings fund is so low that it would have no bearing on their life insurance needs. Harry and Belinda are basing their calculations on a projected 4 percent rate of return after taxes and inflation. They also estimate the following expenses: $15,000 for final expenses, $20,000 for readjustment expenses, and $5,000 for repayment of short-term debts

. (a) Should the $3,000 interest earnings from Harrys trust fund be included in his annual income for the purposes of calculating the likely dollar loss if he were to die? (See the discussions about the Johnsons in Chapter 1 beginning on page 34.) Explain your response.

(b) Based on your response to the previous question, how much more life insurance does Harry need? Use the Run the Numbers worksheet on page 366 to arrive at your answer

. (c) Repeat the calculations to arrive at the additional life insurance needed on Belindas life.

(d) How might the Johnsons most economically meet any additional life insurance needs you have determined they may have?

(e) In addition to their life insurance planning, how might the Johnsons begin to prepare for their retirement years?

CASE 2 Victor and Maria Hernandez Contemplate Switching Life Insurance Policies Victor and Maria Hernandez have a total of $200,000 in life insurance. Victor has a $50,000 cash-value policy purchased more than 20 years ago soon after when they married and a $100,000 group term policy through his employer. Maria has a $50,000 group term insurance policy through her employer. The couple has been approached by a neighbor who is a life insurance agent. He thinks that they need to change their policy mix because, he says, they are inadequately insured. Specifically, the agent has suggested that Victor cash in his cash-value policy and buy a new variable-universal life insurance policy

. (a) If Victor cashes in his policy, what options would he have when receiving the cash value?

(b) Determine what the $16,000 in cash value in Victors life insurance policy would be worth in 20 years if that sum were invested somewhere else and earned an 8 percent annual return. (Hint: Use the Garman/Forgue companion website.) (c) Would cashing in the policy be a wise decision? Why or why not?

(d) As the Hernandezes children are now grown and out on their own, and both Victor and Maria are employed full time, give general reasons why Victor may need more or less insurance

. (e) Explain why it would be a bad idea for Victor to buy a variable-universal life insurance policy.