Case Study 20.9 CASE ANALYSIS

Life, Medical Expense, Disability Income, Property, and Liability Insurance

1. Based on the financial needs analysis approach, is the amount of Ken's present life insurance coverage adequate? For purposes of this question, assume the following additional information:

If Ken dies today, the family's immediate cash needs will consist of - funeral expenses $ 9,000 - estate settlement costs 5,000 - emergency fund 35,000 - additional education fund 200,000 - mortgage redemption 158,000 - bank loan repayment 36,000 $443,000 If Ken dies today, the family's future monthly cash needs, in today's dollars, will consist of - readjustment income for 1 year $ 12,500 income until last child reaches age 22 10,000 income for Sandra from age 50 - to age 67 7,800 income for Sandra after age 67 6,500 Social Security benefits will be paid until the Dawsons youngest child reaches age 18. The monthly benefit will be $1,550 for each child, subject to a family maximum of approximately $3,500 In current dollars, Sandra will be eligible for a Social Security retirement benefit of $2,000 per month at her full retirement age of 67 based on Ken's Social Security account (which is assumed to provide a larger benefit than her own account would). Sandra's profit-sharing plan will provide a projected lifetime benefit of $1,000 per month, beginning at age 67. Due to inflation, the family's income needs and Social Security benefits will grow at 3 percent annually. Sandra plans to continue working until age 67 at about the same salary as at present, adjusted upward for inflation at aproximately 2 percent to 3 percent per year. . . The Dawsons' income-producing assets available after debts are paid can be invested at an after-tax rate of 6.5 percent. This assumption is based on an asset allocation consisting of stocks and bonds.