Case Study 

Life insurance vs. Saving Fund

Oscar and Elisa are a married couple, 50 and 45 years old respectively. Oscar He estimates that his life expectancy will be 25 more years (75 years). He plans to leave his family protected, in such a way that they can lead a standard of living similar to the current one during the last 10 years after his death. Oscar is a consummate and constant smoker. Currently (2004), he receives gross annual income of $400,000.00 (including benefits), which has an annual review according to inflation. tax rate applicable to individuals is 30%. Normal household expenses equal 90% of your take-home pay (includes tuition for your only child); the remaining 10% is the mortgage payment from your house. Oscar made a count of the assets and debt that he will have in 25 years, in case he die: 1. Tax-free death benefit of $50,000 pesos today. 2. From CIRP, Elisa would receive a pension for the following ten years equivalent to 5% of the net salary of her husband. 3. The company's compensation to the widow would be $290,000 pesos today, tax free. 4. From the pension fund you would receive an approximate amount of $150,000 pesos today, free of taxes. 5. I would leave a piece of land, which valued today is worth $350,000, and which earns a capital gain (above of inflation) of 2% per year. 6. The balance of the debts that you estimate to have would be $70,000, including credit cards, which it would be approximately $20,000. 7. Funeral expenses would amount to $60,000 pesos today when he dies.

Oscar estimates that the expenditure necessary to maintain the same standard of living would be reduced by one 20%, missing him and also his children would already be graduated. Oscar wishes to leave as an inheritance to his children the house in which they live, which at that time would be fully paid. The funds or cash resources that Oscar will leave will be invested at the real 4% rate. Value of the Udi= $6.20. For all items in current currency, consider that they will be adjusted equal to or on a par with the current currency. inflation, therefore, to ease the solution, I recommend that you work with UDIS. It is requested: 1. What is the capital that Oscar must raise so that with the yields he covers and maintain your family's standard of living, if expenses remain in real terms? 2. What is the amount or value of the insurance with increasing life coverage that must be purchased? Oscar to meet your personal financial goals? 3. What insurance would you recommend Oscar purchase based on his financial needs? The Dotal national currency (increasing coverage) or the Temporary in dollars (coverage growing). Why? 4. What is the cost or annual premium that you must cover to acquire the insurance that did you recommend Does the premium exceed what is recommended by experts? 5. If Oscar decided to save annually, in investment companies that would give him a 4% real annual return. What should be the amount to achieve your financial goal personal? 6. Explain to Oscar the difference between paying for life insurance and saving, as well as the advantages and disadvantages of each of the two options.