Chapter 12 EXTRA CREDIT 1. Amy and Mack Holly from Rapid City, South Dakota, have been married for three years. They recently bought a home costing $212,000 using a $190,000 mortgage. They have no other debts. Mack earns $64,000 per year, and Amy earns $73,000. Each has a retirement plan valued at approximately $17,000. They recently received an offer in the mail from their mortgage lender for a mortgage life insurance policy of $190,000. Their only life insurance currently is a $25,000 cash-value survivorship joint life policy. They each would like to provide the other with support for at least five years if one of them should die. (10 pts) Assuming $15,000 in final expenses and $20,000 allocated to help make mortgage payments, calculate the amount of life insurance they should purchase using the needs-based approach. Also assume that both Mack and Amy would replace 75 percent of their individual current income for five years. Use a 4 percent after-tax, after-inflation rate of return for your calculations. (Use the attached worksheet) Do not round your intermediate calculations. Round your answers to the nearest dollar. Life insurance needed (Mack): $ Life insurance needed (Amy): S 2. Yvette and Tim Cohen are 38 years old and have one son, age 9. Yvette is the primary wage earner, making $140,000 per year. Tim does not work. The Cohens have decided to use the needs-based approach to calculate the value of a life insurance policy that would provide for Tim and their son in the event of Yvette's death. (10 pts) Final expenses estimated at $18,000 They want to replace Yvette's income until Tim is 65 (27 years) Before they had their son, Tim was a programmer, but he's lost his knowledge would cost $40,000 to go back to school Two auto loans of $32,200 (total) and credit card balance of $1200 12 years remaining on their mortgage but they have provided for this payment with Yvette's replaced income Family would qualify for $8200 monthly social security benefits until the son is Tim would invest benefits at 3% They don't want to use their equity in their home or their 401(k)s in their calculations Yvette has no life insurance currently 18 . Chapter 12 EXTRA CREDIT 1. Amy and Mack Holly from Rapid City, South Dakota, have been married for three years. They recently bought a home costing $212,000 using a $190,000 mortgage. They have no other debts. Mack earns $64,000 per year, and Amy earns $73,000. Each has a retirement plan valued at approximately $17,000. They recently received an offer in the mail from their mortgage lender for a mortgage life insurance policy of $190,000. Their only life insurance currently is a $25,000 cash-value survivorship joint life policy. They each would like to provide the other with support for at least five years if one of them should die. (10 pts) Assuming $15,000 in final expenses and $20,000 allocated to help make mortgage payments, calculate the amount of life insurance they should purchase using the needs-based approach. Also assume that both Mack and Amy would replace 75 percent of their individual current income for five years. Use a 4 percent after-tax, after-inflation rate of return for your calculations. (Use the attached worksheet) Do not round your intermediate calculations. Round your answers to the nearest dollar. Life insurance needed (Mack): $ Life insurance needed (Amy): S 2. Yvette and Tim Cohen are 38 years old and have one son, age 9. Yvette is the primary wage earner, making $140,000 per year. Tim does not work. The Cohens have decided to use the needs-based approach to calculate the value of a life insurance policy that would provide for Tim and their son in the event of Yvette's death. (10 pts) Final expenses estimated at $18,000 They want to replace Yvette's income until Tim is 65 (27 years) Before they had their son, Tim was a programmer, but he's lost his knowledge would cost $40,000 to go back to school Two auto loans of $32,200 (total) and credit card balance of $1200 12 years remaining on their mortgage but they have provided for this payment with Yvette's replaced income Family would qualify for $8200 monthly social security benefits until the son is Tim would invest benefits at 3% They don't want to use their equity in their home or their 401(k)s in their calculations Yvette has no life insurance currently 18
