Andrew and Beth Arnold have completed Step 1 of their needs analysis worksheet and determined that they need $2,418,000 to maintain the projected lifestyle of Beth (age 41) and their two children (ages 7 and 11) in the event of Andrew's (the primary earner's) death. The Arnolds also have certain financial resources available after Andrew's death, however, so their life insurance needs are lower than this amount. If Andrew dies, Beth will be eligible to receive Social Security survivors' benefits-approximately $3,500 a month ($42,000 a year) until the youngest child graduates from high school in 9 years. After the children leave home, Beth will be able to work full-time and earn an estimated $52,000 a year (after taxes) until she retires at age 65. After Beth turns 65, she'll receive approximately $3,100 a month ($37,200 a year) from her own Social Security and retirement benefits. The life expectancy for a woman within Beth's demographic is 87. The couple has also saved $60,000 in a mutual fund, and Andrew's employer provides him 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 "O" 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 $0 $0 a. Annual Social Security survivors' benefits b. Surviving spouse's annual income c. Other annual pensions and Social Security benefits $42,000 $0 $0 $0 $0 $37,200 Step 2: Financial Resources Available After Death 1. Income Period 3 Period 2 $0 $0 Period 1 $42,000 $0 $0 $42,000 3 $0 $0 $37,200 15 22 8. Annual Social Security survivors' benefits b. Surviving spouse's annual income c. Other annual pensions and Social Security benefits d. Annual income (1a + 16 + 10) Number of years in time period 1. Total period Income (10 x 10) g. Total income 2. Savings and investments 3. Other life insurance 4. Other resources Total financial resources available (19 + 2 + 3 + 4): $378,000 . $1,976,400 $0 $2,136,400 Finally, to determine the value of life insurance Andrew and Beth should purchase, complete Step 3 of the needs analysis method by subtracting the total financial resources available from the total financial resources needed. g. Total income 2. Savings and investments 3. Other life insurance 4. Other resources Total financial resources available (19 +2+3+4) 50 $2,136,400 Finally, to determine the value of life insurance Andrew and Beth 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 $2,418,000 Total financial resources available (from Step 2) $2,136,400 Additional life insurance needed True or False Alternatively, the Arnolds could have estimated their life insurance needs using the multiple-of-earnings method, a more complicated but more accurate method than the needs analysis, False True
