CASE STUDY

Ned and Nelly Norbert, both aged 35, have three small children. Nancy aged 10, Nadia aged 8, and Nadine aged 3. The Norberts want to ensure that they have adequate resources in place to complete their estate plans, should Ned pass away prematurely. Considering their current resources and expressed needs as noted below, what is an appropriate amount of life insurance they should consider? Needs

Pay final expenses of $20,000 Repay credit card debt of $12,000 Repay mortgage on the family home of $250,000 Repay car loan of $9,000 Establish an educational fund of $50,000 for the children Charitable bequest of $15,000.

Current Resources / Assets Cash in savings account of $4,000. Group insurance on Neds life of $80,000 Spousal group insurance on Nellys life of $40,000 If Ned dies, Nelly will start to work as a teacher and will earn $50,000 per year. She will participate in the teachers pension plan until age 60, at which time her pension will be approximately $22,000 per year.

Objectives

They want to maintain the family income at $90,000 per year while the children are minors, then $60,000 until her retirement at age 60, and $50,000 thereafter. They are assuming Nelly will live to age 90. For planning purposes, the Norberts have chosen to disregard any provisions for government sponsored benefits arising from a premature death, and any tax deductions for Nelly. Note: To simplify the capital needs analysis, ignore inflation and assume a 4% rate of return can be earned on any monies invested to generate income.

Assume that Ned has just died. Taking into considering the Norberts current resources and expressed needs, answer each of the following questions with calculations .

Questions

1. What is the immediate net cash position after paying final expenses?

2. If they were to also repay their debts and cover other lump-sum needs, how much additional liquid cash would be required?

3. With respect to their long-term income needs, what is the annual income shortfall in each of the periods identified?

4. It has been determined that on average there will be a shortfall of $2,250 per month in ongoing income to meet all the long-term income needs. They do not want to use up any capital, only the earnings on that capital, to cover the shortfall. How much capital would be required to cover this shortfall if they could get an investment return of 4% per year on the capital?

5. Using the information from the questions 1, 2 and 4, what is the additional amount of insurance on Neds life that would be required to meet the familys objectives?

6. What type of insurance and in what amounts would you recommend? Provide an explanation to justify each of your recommendations. ___________________________________________________________