CA 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 in- surance 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 an- other's income for only four years, assuming the sur- vivor 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 infla- tion. 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 Harry's 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 Belinda's 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? 366 PART 3 Income and Asset Protection RUN THE NUMBERS The Needs-Based Approach to Life Insurance This worksheet provides a mechanism for estimating life insurance needs using the needs-based approach. The amounts needed for final expenses, income replacement, readjustment needs, debt repayment, college expenses, and other special needs are calculated and the reduced by funds available from government benefits and any current insurance or assets that could cover the need This worksheet is also available on the Garman/Forgue companion website Example Your Figures $12,000 +823,217 +_ +19,000 +_ +10,000 Factors Affecting Need 1. Final-expense needs Includes funeral, burial, travel, and other items of expense just prior to and after death 2. Income-replacement needs Multiply 75 percent of annual income by the Interest factor from Appendix A-4 that corresponds to the number of years that the income is to be replaced and the assumed after-tax, after-inflation rate of return. (542,000 X 19.6004 for 30 years at a 3% rate of return) 3. Readjustment period needs To cover employment interruptions and possible education expenses for surviving spouse and dependents 4. Debt-repayment needs Provides repayment of short-term and installment debt, including credit cards and personal loans 5. College-expense needs To provide a fund to help meet college expenses of dependents 6. Other special needs 7. Subtotal (combined effects of Items 1-6) 8. Government benefits Present value of Social Security survivor's benefits and other benefits. Multiply monthly benefit estimate by 12 and use Appendix A-4 for the number of years that benefits will be received and the same interest rate that was used in item 2. (52.725 X 12 X 11.9379 for 15 years of benefits and a 3% rate of return) 9. Current insurance assets 10. Life insurance needed +75,000 +0 +$939,217 - 390,369 -100,000 $448,848 $_ Seventy-five percent is used because about 25 percent of income is used for personal needs should never buy life young and rates are). The agen ning for more tha n a vehicle. Best in low rates Tu Smart idea becaus with the pure you have a nurance Prices have been steadily The resulting calculations show that Baomei needs no additional life insuran dhat Romei ($12,000+ $49,000 - $70,000 -$9,000). The agent also suggested that Box buy now while she is young and rates are low. This is not a smart idea because should never buy life insurance simply to lock in low rates. That would be like buy car insurance before you own a vehicle. Besides, life insurance prices bave been se declining for more than a decade. Unless you have a personal or family-based history that might interfere with the purchase of life insurance when needed like Baomci, should wait until you actually need life insurance before buying a po sed medical LUUUUU CASE 1 Harry and Belinda Johnson Consider Inflation and Children Throughout this book, we will present a continuing nar- rative about Harry and Belinda Johnson. Following is a brief description of the lives of this couple. Harry is 28 years old and graduated five years ago with a bachelor's degree in interior design from a large Midwestern university near his hometown in Indiana. Since graduation Harry has been working in small inte rior design firm in Kansas City earning a salary of about $50,000. Belinda is 27, has a degree in business administra- tion from a university on the West Coast, and has been employed in a medium-size manufacturing firm in California for about five years. Harry and Belinda both worked on their schools' student newspapers and met at a conference during their junior year in college. After all these years they met again socially in January in Kansas City, Missouri where Belinda was visiting relatives and by chance she and Harry were at the same museum. After getting reacquainted they started dating and in only a matter of months Belinda got transferred from California to work in Kansas City and in June they got married. Belinda is now employed as a stockbroker earning about $77,000 annually. After the wedding they moved into his small apart- ment. They will face many financial challenges over the next few decades as they buy their first home, decide on life insurance needs, begin a family, change jobs, and in- vest for retirement. (a) Harry receives $3,000 in once a year interes come payments from a trust fund set up by hie deceased father's estate. The amount will never change until it runs out in 20 years. What will be the buying power of $3,000 in ten years if inflar rises at 3 percent a year? (Hint: Use Appendix A2 (b) Belinda and Harry have discussed starting a family but decided to wait for perhaps five more years in order to get their careers moving along well and getting their personal finances solidly on the road to success. They also know that having children is expensive. The government's figure is that the extra expense of a child would be about $16,000 a year through high school graduation. How much money will they likely cumulatively spend on a child over 18 years assuming a 3 percent inflation rate? (Hint: Use Appendix A.3.) CASE 2 Victor and Maria Hernandez Look at Future Income Throughout this book, we will present a continuing narrative about Victor and Maria Hernandez. Following is a brief description of the lives of this couple. Victor and Maria, both in their late 30s, have two children: Jacob, age 13, and Nicholas, age 15. Victor ha had a long sales career with a retail appliance store Fargo, North Dakota earning $53,000 annually. Mani works as a medical records assistant earning $32,000. (a) Victor and Maria regularly buy and sell a number of items on eBay, Craig's List, and through the free CA 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 in- surance 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 an- other's income for only four years, assuming the sur- vivor 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 infla- tion. 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 Harry's 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 Belinda's 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? 366 PART 3 Income and Asset Protection RUN THE NUMBERS The Needs-Based Approach to Life Insurance This worksheet provides a mechanism for estimating life insurance needs using the needs-based approach. The amounts needed for final expenses, income replacement, readjustment needs, debt repayment, college expenses, and other special needs are calculated and the reduced by funds available from government benefits and any current insurance or assets that could cover the need This worksheet is also available on the Garman/Forgue companion website Example Your Figures $12,000 +823,217 +_ +19,000 +_ +10,000 Factors Affecting Need 1. Final-expense needs Includes funeral, burial, travel, and other items of expense just prior to and after death 2. Income-replacement needs Multiply 75 percent of annual income by the Interest factor from Appendix A-4 that corresponds to the number of years that the income is to be replaced and the assumed after-tax, after-inflation rate of return. (542,000 X 19.6004 for 30 years at a 3% rate of return) 3. Readjustment period needs To cover employment interruptions and possible education expenses for surviving spouse and dependents 4. Debt-repayment needs Provides repayment of short-term and installment debt, including credit cards and personal loans 5. College-expense needs To provide a fund to help meet college expenses of dependents 6. Other special needs 7. Subtotal (combined effects of Items 1-6) 8. Government benefits Present value of Social Security survivor's benefits and other benefits. Multiply monthly benefit estimate by 12 and use Appendix A-4 for the number of years that benefits will be received and the same interest rate that was used in item 2. (52.725 X 12 X 11.9379 for 15 years of benefits and a 3% rate of return) 9. Current insurance assets 10. Life insurance needed +75,000 +0 +$939,217 - 390,369 -100,000 $448,848 $_ Seventy-five percent is used because about 25 percent of income is used for personal needs should never buy life young and rates are). The agen ning for more tha n a vehicle. Best in low rates Tu Smart idea becaus with the pure you have a nurance Prices have been steadily The resulting calculations show that Baomei needs no additional life insuran dhat Romei ($12,000+ $49,000 - $70,000 -$9,000). The agent also suggested that Box buy now while she is young and rates are low. This is not a smart idea because should never buy life insurance simply to lock in low rates. That would be like buy car insurance before you own a vehicle. Besides, life insurance prices bave been se declining for more than a decade. Unless you have a personal or family-based history that might interfere with the purchase of life insurance when needed like Baomci, should wait until you actually need life insurance before buying a po sed medical LUUUUU CASE 1 Harry and Belinda Johnson Consider Inflation and Children Throughout this book, we will present a continuing nar- rative about Harry and Belinda Johnson. Following is a brief description of the lives of this couple. Harry is 28 years old and graduated five years ago with a bachelor's degree in interior design from a large Midwestern university near his hometown in Indiana. Since graduation Harry has been working in small inte rior design firm in Kansas City earning a salary of about $50,000. Belinda is 27, has a degree in business administra- tion from a university on the West Coast, and has been employed in a medium-size manufacturing firm in California for about five years. Harry and Belinda both worked on their schools' student newspapers and met at a conference during their junior year in college. After all these years they met again socially in January in Kansas City, Missouri where Belinda was visiting relatives and by chance she and Harry were at the same museum. After getting reacquainted they started dating and in only a matter of months Belinda got transferred from California to work in Kansas City and in June they got married. Belinda is now employed as a stockbroker earning about $77,000 annually. After the wedding they moved into his small apart- ment. They will face many financial challenges over the next few decades as they buy their first home, decide on life insurance needs, begin a family, change jobs, and in- vest for retirement. (a) Harry receives $3,000 in once a year interes come payments from a trust fund set up by hie deceased father's estate. The amount will never change until it runs out in 20 years. What will be the buying power of $3,000 in ten years if inflar rises at 3 percent a year? (Hint: Use Appendix A2 (b) Belinda and Harry have discussed starting a family but decided to wait for perhaps five more years in order to get their careers moving along well and getting their personal finances solidly on the road to success. They also know that having children is expensive. The government's figure is that the extra expense of a child would be about $16,000 a year through high school graduation. How much money will they likely cumulatively spend on a child over 18 years assuming a 3 percent inflation rate? (Hint: Use Appendix A.3.) CASE 2 Victor and Maria Hernandez Look at Future Income Throughout this book, we will present a continuing narrative about Victor and Maria Hernandez. Following is a brief description of the lives of this couple. Victor and Maria, both in their late 30s, have two children: Jacob, age 13, and Nicholas, age 15. Victor ha had a long sales career with a retail appliance store Fargo, North Dakota earning $53,000 annually. Mani works as a medical records assistant earning $32,000. (a) Victor and Maria regularly buy and sell a number of items on eBay, Craig's List, and through the free