8.2 The Jennings Want to Know: How Much Is Enough?

Darrell and Lena Jennings are a two-income couple in their early 30s. They have two children, ages 6 and 3. Darrells monthly take-home pay is $3,600, and Lenas is $4,200. The Jennings feel that, because theyre a two-income family, they both should have adequate life insurance coverage. Accordingly, they are now trying to decide how much life insurance each one of them needs. To begin with, theyd like to set up an education fund for their children in the amount of $120,000 to provide college funds of $15,000 a yearin todays dollarsfor four years for each child. Moreover, if either spouse should die, they want the surviving spouse to have the funds to pay off all outstanding debts, including the $210,000 mortgage on their house. They estimate that they have $25,000 in consumer installment loans and credit cards. They also project that if either of them dies, the other probably will be left with about $10,000 in final estate and burial expenses. Regarding their annual income needs, Darrell and Lena both feel strongly that each should have enough insurance to replace her or his respective current income level until the youngest child turns 18 (a period of 15 years). Although neither Darrell nor Lena would be eligible for Social Security survivors benefits because they both intend to continue working, both children would qualify in the (combined) amount of around $1,800 a month. The Jennings have accumulated about $75,000 in investments, and they have a decreasing term life policy on each other in the amount of $100,000, which could be used to partially pay off the mortgage. Darrell also has an $80,000 group life insurance policy at work and Lena a $100,000 group life insurance policy

Critical Thinking Questions

1. Assume that Darrells gross annual income is $54,000 and Lenas is $64,000. Their insurance agent has given them a multiple earnings table showing that the earnings multiple to replace 75 percent of their lost earnings is 8.7 for Darrell and 7.4 for Lena. Use this approach to find the amount of life insurance each should have if they want to replace 75 percent of their lost earnings.

2. Use Worksheet 8.1 to find the additional insurance needed on both Darrells and Lenas lives. (Because Darrell and Lena hold secure, well-paying jobs, both agree that they wont need any additional help once the kids are grown; both also agree that theyll have plenty of income from Social Security and company pension benefits to take care of themselves in retirement. Thus, when preparing the worksheet, assume funding needs of zero in Periods 2 and 3.)

3. Is there a difference in your answers to Questions 1 and 2? If so, why? Which number do you think is more indicative of the Jennings life insurance needs? Using the amounts computed in Question 2 (employing the needs approach), what kind of life insurance policy would you recommend for Darrell? For Lena? Briefly explain your answers.