Financial Literacy Worksheet 8.1 Determining Life Insurance Needs INSTRUCTIONS: Complete Worksheet 8.1 based upon the following scenario for Miriam Epstein. Sharon Epstein 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 Miriam. Sharon's only income is $850 a month in Social Security survivor's benefits. Miriam wants to make sure her mother will be taken care of if Miriam should die. Miriam, 40, is single and earns $55,000 a year as a human resources manager for a small manufacturing firm. She owns a condominium with a current market value of $100,000 and has a $70,000 mortgage. Other debts include a $5,000 auto loan and $500 in various credit card balances. Her 401(k) plan has a current balance of $24,500, and she keeps $7,500 in a money market account for emergencies. After talking with her mother's doctor, Miriam believes that her mother will be able to continue living with Miriam for approximately 3 more years. She estimates that her mother would need about $2,000 a month to cover her living expenses and medical costs during this time. After that, Miriam's mother will probably need nursing home care. Miriam calls several local nursing homes and finds that it will cost about $5,000 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 or more years after diagnosis. Miriam has decided to plan for 3 years of independent living (as mentioned above) followed by 10 years of nursing home care. Miriam also estimates that her own personal final expenses would be around $5,000, and she would like to provide a $25,000 contingency fund that would be used to pay a trusted friend to supervise her mother's care if Miriam were no longer alive. Use Worksheet 8.1 to calculate Miriam's total life insurance requirements. LIFE INSURANCE NEEDS ANALYSIS Date Insured's Name Period 2 Period 3 $ $ $ $ STEP 1: ESTIMATE THE TOTAL ECONOMIC RESOURCES NEEDED 1. Annual living expenses and other needs: Period 1 a. Monthly living expenses $ $ b. Net yearly income needed (ax 12) $ $ c Number of years in time period d. Total living need per time period (bxc) $ $ TOTAL LIVING EXPENSES (add line d for each period): 2. Special needs: Spouse education fund b. Children's college fund Other needs 3. Final expenses (funeral, estate costs, etc.) 4. Debt liquidation: House mortgage S $ b. Other loans c. Total debt (4 a + 4b) 5. Other financial needs: TOTAL INCOME NEEDS (add right column) a $ $ $ $ olul C $ s $ $ $ Period 2 Period 3 $ $ $ STEP 2: FINANCIAL RESOURCES AVAILABLE AFTER DEATH 1. Income: Period 1 a Annual Social Security benefits $ b. Surviving spouse's annual income C Other annual pensions & Soc. Sec. benefits d. Annual income $ e. Number of years in time period f. Total period income (dxe) $ g. TOTAL INCOME 2. Savings and investments 3. Other life insurance 4. Other resources TOTAL RESOURCES AVAILABLE (18+2+3+4) $ $ $ $ $ $ $ $ STEP 3: SUBTRACT AVAILABLE RESOURCES (STEP 2) FROM TOTAL INCOME NEEDS (STEP 1) Step 1: Total income needs Step 2: Available resources ADDITIONAL LIFE INSURANCE NEEDED $ $
