3. How much life insurance do you need? Calculating resources- Part 2

Hilary and Edison Klein have completed Step 1 of their needs analysis worksheet and determined that they need $2,418,000 to maintain the projected lifestyle of Edison (age 38) and their two children (ages 8 and 10) in the event of Hilarys (the primary earners) death. The Kleins also have certain financial resources available after Hilarys death, however, so their life insurance needs are lower than this amount.

If Hilary dies, Edison will be eligible to receive Social Security survivors benefitsapproximately $3,800 a month ($45,600 a year) until the youngest child graduates from high school in 10 years. After the children leave home, Edison will be able to work full-time and earn an estimated $38,000 a year (after taxes) until he retires at age 65. After Edison turns 65, hell receive approximately $3,200 a month ($38,400 a year) from his own Social Security and retirement benefits. The life expectancy for a man within Edisons demographic is 80. The couple has also saved $42,300 in a mutual fund, and Hilarys employer provides her a $100,000 life insurance policy.

Using this information, complete Step 2 of the needs analysis worksheet to estimate their total financial resources available after death. (Note: If the value of a certain entry is zero, be sure to enter 0 to receive credit.)

Life Insurance Needs Analysis Worksheet (Part 2)

Step 2: Financial Resources Available After Death
1. Income
	Period 1	Period 2	Period 3
a. Annual Social Security survivors benefits	$45,600	$0	$0
b. Surviving spouses annual income	$0		$0
c. Other annual pensions and Social Security benefits	$0	$0	$38,400
d. Annual income (1a + 1b + 1c)	$45,600
e. Number of years in time period	10	17	15
f. Total period income (1d x 1e)	$456,000
g. Total income				$1,678,000
2. Savings and investments
3. Other life insurance
4. Other resources				$0
Total financial resources available (1g + 2 + 3 + 4):				$1,820,300

Finally, to determine the value of life insurance Hilary and Edison should purchase, complete Step 3 of the needs analysis method by subtracting the total financial resources available from the total financial resources needed.

Step 3: Additional Life Insurance Needed
Total financial resources needed (from Step 1)	$2,418,000
Total financial resources available (from Step 2)	$1,820,300
Additional life insurance needed:

True or False: Alternatively, the Kleins could have estimated their life insurance needs using the multiple-of-earnings method, a less complicated but less accurate method than the needs analysis.

False

True