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

Ryan and Alison Nisbit are a two-income couple in their early 30s. They have two children, ages 6 and 3. Ryan's monthly take-home pay is $3,600, and Alison's is $4,200. The Nisbits 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, Ryan and Alison 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 Ryan nor Alison 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 Nisbits have amassed 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. Ryan also has an $80,000 group policy at work and Alison a $100,000 group policy.

Assume that Ryan's gross annual income is $53,000 and Alison's is $70,000. Their insurance agent has given them a multiple earnings table showing that the earnings multiple to replace 75 percent of their lost earnings is 9 for Ryan and 7.2 for Alison. 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 Ryan: $ Life insurance needed by Alison: $

Use Worksheet 8.1 to find the additional insurance needed on both Ryan's and Alison's lives. (Because Ryan and Alison 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 Ryan $ Additional insurance needed by Alison $