Chapter 8 Critical Thinking Case 2 The Jennings Want to Know: How Much Is Enough?

Darrell and Lena Jennings are a two-income couple in their early 30s. They have two children, ages 6 and 3. Darrell's monthly take-home pay is $3,600, and Lena's is $4,200. The Jennings feel that, because they're a two-income family, they both should have adequate life insurance coverage. Accordingly, they are now trying to decide how much life insurance each one of them needs. To begin with, they'd like to set up an education fund for their children in the amount of $120,000 to provide college funds of $15,000 a year - in today's dollars - for four years for each child. Moreover, if either spouse should die, they want the surviving spouse to have the funds to pay off all outstanding debts, including the $210,000 mortgage on their house. They estimate that they have $25,000 in consumer installment loans and credit cards. They also project that if either of them dies, the other probably will be left with about $10,000 in final estate and burial expenses. Regarding their annual income needs, Darrell and Lena both feel strongly that each should have enough insurance to replace her or his respective current income level until the youngest child turns 18 (a period of 15 years). Although neither Darrell nor Lena would be eligible for Social Security survivor's benefits because they both intend to continue working, both children would qualify in the (combined) amount of around $1,800 a month. The Jennings have accumulated about $75,000 in investments, and they have a decreasing term life policy on each other in the amount of $100,000, which could be used to partially pay off the mortgage. Darrell also has an $80,000 group policy at work and Lena a $100,000 group policy.

Assume that Darrell's gross annual income is $54,000 and Lena's is $63,000. Their insurance agent has given them a multiple earnings table showing that the earnings multiple to replace 75 percent of their lost earnings is 8.2 for Darrell and 7.3 for Lena. Use this approach to find the amount of life insurance each should have if they want to replace 75 percent of their lost earnings. Life insurance needed by Darrell: $ Life insurance needed by Lena: $

Use Worksheet 8.1 to find the additional insurance needed on both Darrell's and Lena's lives. (Because Darrell and Lena hold secure, well-paying jobs, both agree that they won't need any additional help once the kids are grown; both also agree that they'll have plenty of income from Social Security and company pension benefits to take care of themselves in retirement. Thus, when preparing the worksheet, assume "funding needs" of zero in Periods 2 and 3.) Additional insurance needed by Darrell $ Additional insurance needed by Lena $

Is there a difference in your answers to Questions 1 and 2? If so, why? Which number do you think is more indicative of the Jennings' life insurance needs? Using the amounts computed in Question 2 (employing the needs approach), what kind of life insurance policy would you recommend for Darrell? For Lena? Briefly explain your answers.

Chapter 8 Financial Planning Exercise 1 Estimating life insurance needs

Use Worksheet 8.1 Katie Holt is a 72-year-old widow who has recently been diagnosed with Alzheimer's disease. She has limited financial assets of her own and has been living with her daughter Laurie for 2 years. Her only income is $600 a month in Social Security survivor's benefits. Laurie wants to make sure her mother will be taken care of if Laurie should die. Laurie, 40, is single and earns $60,000 a year as a human resources manager for a small manufacturing firm. She owns a condo with a current market value of $110,000 and has a $64,000 mortgage. Other debts include a $3,500 auto loan and $400 in various credit card balances. Her 401(k) plan has a current balance of $65,000, and she keeps $5,500 in a money market account for emergencies. After talking with her mother's doctor, Laurie believes that her mother will be able to continue living independently for another 3 years. She estimates that her mother would need about $1,650 a month to cover her living expenses and medical costs during this time. After that, Laurie's mother will probably need nursing home care. Laurie calls several local nursing homes and finds that it will cost about $3,500 a month when her mother enters a nursing home. Her mother's doctor says it is difficult to estimate her mother's life expectancy but indicates that with proper care some Alzheimer's patients can live 10 years after diagnosis. Laurie also estimates that her personal final expenses would be around $13,000, and she'd like to provide a $35,000 contingency fund that would be used to pay a trusted friend to supervise her mother's care if Laurie were no longer alive. Use Worksheet 8.1 to calculate Laurie's total life insurance requirements. In your analysis, assume an incidental special need amount of $13,000.

$

Recommend the type of policy she should buy. In your analysis, assume an incidental special need amount of $13,000.