Case 6. A Married Couple with Children Address Their Life Insurance Needs. Joseph and Marcia Michael of Athens, Georgia, are a married couple in their mid-30s. They have two children, ages 5 and 3, and Marcia is pregnant with their third child. Marcia is a part-time book indexer who earned $30,000 after taxes last year. Because she performs much of her work at home, it is unlikely that she will need to curtail her work after the baby is born. Joseph is a marriage counselor; he earned $75,000 last year after taxes. Because both are self-employed, Marcia and Joseph do not have access to group life insurance. They are each covered by $50,000 universal life policies they purchased three years ago. In addition, Joseph is covered by a $50,000, five-year guaranteed renewable term policy, which will expire next year. The Michaels are currently reassessing their life insurance program. As a preliminary step in their analysis, they have determined that Marcia's three survivors would qualify for Social Security survivor's benefits of about $1,900 per month, or an annual benefit of $22,800, if she were to die. For Joseph's survivors, the figure would be $2,800 per month, or an annual benefit of $33,600. Both agree that they would like to support each of their children to age 22, but to date, they have been unable to start a college savings fund. The couple estimates that it would cost $300,000 to put all three children through a regional university in their state as measured in today's dollars. They expect that burial expenses for each spouse would total about $12,000, and they would like to have a lump sum of $50,000 to help the surviving spouse make payments on their home mortgage. They also feel that each spouse would want to take a three-month leave from work if the other were to die.

(a) Calculate the amount of life insurance that Marcia needs based on the information given. Assume a 3 percent rate of return after taxes and inflation and an income need for 22 years because the unborn child will need financial support for that many years.

(b) Calculate the amount of life insurance that Joseph needs based on the information given. Assume a 3 percent rate of return after taxes and inflation and an income need for 22 years because the unborn child will need financial support for that many years.

Needs-Based Approach to Life Insurance
Factors Affecting Need
	Marcia	Joseph
Final-expense needs
Income-replacement needs (time value of money calculation)	N = 22 I/Y = 3 PV = CPT PMT = 30,000 x 0.75 FV = 0	N = 22 I/Y = 3 PV = CPT PMT = 75,000 x 0.75 FV = 0
Readjustment-period needs: 3-month leave from work
Debt-repayment needs
College-expense needs
Other special needs: Lump-sum mortgage payment
Subtotal (Needs):
Government benefits (time value of money calculation)	N = 18 x 12 I/Y = 3 / 12 PV = CPT PMT = 1,900 FV = 0	N = 18 x 12 I/Y = 3 / 12 PV = CPT PMT = 2,800 FV = 0
Current insurance assets: Universal life policy 5-year guaranteed renewable term
Subtotal (Benefits and Assets):
Life insurance needed: