Harry and Belinda Johnson spend $20 per month on life insurance in the form of a premium on a $9,000, paid-at-65 cash-value policy on Harry that his parents bought for him years ago. Belinda has a group term insurance policy from her employer with a face amount of $200,000. By choosing a group life insurance plan from his menu of employee benefits, Harry now has $90,000 of group term life insurance. Harry and Belinda have decided that, because they have no children, they could reduce their life insurance needs by protecting one another's income for only four years, assuming the survivor would be able to fend for himself or herself after that time. They also realize that their savings fund is so low that it would have no bearing on their life insurance needs. Harry and Belinda are basing their calculations on a projected 5 percent rate of return after taxes and inflation. They also estimate the following expenses: $16,000 for final expenses, $22,000 for readjustment expenses, and $4,000 for repayment of short-term debts. Harry works in small interior design firm in Kansas City earning a salary of about $51,000. Belinda is now employed as a stockbroker earning about $78,000 annually.

A. Should the $2,500 interest earnings from Harry's trust fund be included in his annual income for the purposes of calculating the likely dollar loss if he were to die? (Harry receives $2,500 in interest income annually from a trust fund set up by his deceased father's estate. The amount will never change.)

(Yes or no and explain)

B. Based on your response to the previous question, how much more life insurance does Harry need? Use the Run the Numbers worksheet to arrive at your answer. (Use Appendix A.4.) Round Present value of a Series of Equal Amounts in intermediate calculations to four decimal places. Round your answer to the nearest dollar.

C. Repeat the calculations to arrive at the additional life insurance needed on Belinda's life. Use the Run the Numbers worksheet to arrive at your answer. (Use Appendix A.4.) Round Present value of a Series of Equal Amounts in intermediate calculations to four decimal places. Round your answer to the nearest dollar.

RUN THE NUMBERS 01 The Needs-Based Approach to Life Insurance This worksheet provides a mechanism for estimating life insurance needs using the needs-based approach. The amounts needed for final expenses, income replacement, readjustment needs, debt repayment, college expenses, and other special needs are calculated and then reduced by funds available from government benefits and any current insurance or assets that could cover the need. This worksheet is also available on the Garman/Forgue companion website. Example Your Figures $12,000 +823,217 + +19,000 Factors Affecting Need 1. Final-expense needs Includes funeral, burial, travel, and other items of expense just prior to and after death 2. Income-replacement needs Multiply 75 percent of annual income* by the interest factor from Appendix A-4 that corresponds to the number of years that the income is to be replaced and the assumed after-tax, after-inflation rate of return. ($42,000 X 19.6004 for 30 years at a 3% rate of return) 3. Readjustment period needs To cover employment interruptions and possible education expenses for surviving spouse and dependents 4. Debt-repayment needs Provides repayment of short-term and installment debt, including credit cards and personal loans 5. College-expense needs To provide a fund to help meet college expenses of dependents 6. Other special needs 7. Subtotal (combined effects of items 1-6) 8. Government benefits Present value of Social Security survivor's benefits and other benefits. Multiply monthly benefit estimate by 12 and use Appendix A-4 for the number of years that benefits will be received and the same interest rate that was used in item 2. ($2,725 x 12 x 11.9379 for 15 years of benefits and a 3% rate of return) 9. Current insurance assets 10. Life insurance needed +10,000 + +75,000 +0 +$939,217 -390,369 -100,000 $448,848 *Seventy-five percent is used because about 25 percent of income is used for personal needs. Appendix A-4 Present Value of a Series of Equal Amounts (an Annuity of $1 Received at the End of Each Period) (Used to compute the Discounted Present Value of a Stream of Income Payments) n 2% 3% 5% 1% 0.9901 1 0.9804 0.9709 1.9135 4% 0.9615 1.8861 0.9524 1.8594 6% 0.9434 1.8334 7% 0.9346 1.8080 8% 0.9259 1.7833 2 1.9704 1.9416 3 2.9410 2.8839 2.6730 2.7751 3.6299 2.7232 3.5460 4 2.8286 3.7171 4.5797 3.9020 3.8077 4.7135 3.4651 4.2124 2.6243 3.3872 4.1002 2.5771 3.3121 3.9927 5 4,8534 4.4518 43295 6 5.7955 5.2421 5.0757 4.9173 4.7665 4.6229 5.4172 6.2303 7 6.7282 6.0021 5.7864 5.3893 5.2064 5.6014 6.4720 7.3255 8.1622 8 6.4632 5.9713 5.7466 5.5824 6.2098 6.8017 7.6517 8.5660 4.7988 7,0197 7.7861 6.7327 7.4353 9 7.1078 6.5152 6.2469 10 9.4713 8.9826 8.5302 8.1109 7.7217 7.3601 7.0236 6.7101 7.1390 11 10.3676 9.7868 9.2526 8.7605 8.3064 7.8869 7.4987 12 11.2551 10.5753 9.9540 9.3851 8.8633 8.3838 7.9427 7.5361 13 12.1337 11.3484 10.6350 9.9856 8.8527 7.9038 9.3936 9.8986 8.3577 8.7455 14 13.0037 12.1062 11.2961 10.5631 9.2950 8.2442 15 13.8651 12.8493 11.9379 11.1184 10.3797 9.7122 9.1079 8.5595 16 14.7179 10.8378 9.4466 13.5777 14.2919 12.5611 13.1661 11.6523 12.1657 10.1059 10.4773 8.8514 9.1216 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 0.9174 09091 0.9009 0.8929 0.8850 0.8772 0.8696 0.8621 0.8547 0.8475 0.8403 0.8333 1.7591 1.7355 1.7125 1.6901 1.6681 1.6467 1.6257 1.6052 1.5852 1.5656 1.5465 1.5278 2.5313 2.4869 2.4437 2.4018 2.3612 2.3216 2.2832 2.2459 2.2096 2.1743 2.1399 2.1065 3.2397 3.1699 3.1024 3.0373 2.9745 2.9137 2.8550 2.7982 2.7432 2.6901 2.6386 2.5887 3.8897 3.7908 3.6959 3.6048 3.5172 3.4331 3.3522 3.2743 3.1993 3.1272 3.0576 2.9906 4.4859 4.3553 4.2305 4.1114 3.9975 3.8887 3.7845 3.6847 3.5892 3.4976 3.4098 3.3255 5.0330 4.8684 4.7122 4.5638 4.4226 4.2883 4.1604 4.0386 3.9224 3.8115 3.7057 3.6046 5.5348 5.3349 5.1461 4.9676 4.6389 4.4873 43436 4.2072 4.0776 3.9544 3.8372 5.9952 5.7590 5.5370 5.3282 5.1317 4.9464 4.7716 4.6065 4.4506 4.3030 4.1633 4.0310 6.4177 6.1446 5.8892 5.6502 5.4262 5.2161 5.0188 4.8332 4.6586 4.4941 43389 4.1925 6.8052 6.4951 6.2065 5.9377 5.6869 5.4527 5.2337 5.0286 4.8364 4.6560 4.4865 4.3271 7.1607 6.8137 6.4924 6.1944 5.9176 5.6603 5.4206 5.1971 4.9884 4.7932 4.6105 4.4392 7.4869 7.1034 6.7499 6.4235 6.1218 5.8424 5.5831 5.3423 5.1183 4.9095 4.7147 4.5327 7.7862 7.3667 6.9819 6.6282 6.3025 6.0021 5.7245 5.4675 5.2293 5.0081 4.8023 4.6106 8.0607 7.6061 7.1909 6.8109 6.4624 6.1422 5.8474 5.5755 5.3242 5.0916 4.8759 4.6755 8.3126 7.8237 7.3792 6.9740 6.6039 6.2651 5.9542 5.6685 5.4053 5.1624 4.9377 4.7296 8.5436 8.0216 7.5488 7.1196 6.7291 6.3729 6.0472 5.7487 5.4746 5.2223 4.9897 4.7746 8.7556 8.2014 7.7016 7.2497 6.8399 6.4674 6.1280 5.8178 5.5339 5.2732 5.0333 4.8122 8.9501 8.3649 7.3658 6.5504 6.1982 5.5845 5.3162 5.0700 4.8435 9.1285 8.5136 7.9633 7.4694 7.0248 6.6231 6.2593 5.9288 5.6278 5.3527 5.1009 4.8696 9.2922 8.6487 8.0751 7.5620 7.1016 6.6870 6.3125 5.9731 5.6648 5.3837 5.1268 4.8913 9.4424 8.7715 8.1757 7.6446 7.1695 6.7429 6.3587 6.0113 5.6964 5.4099 5.1486 4.9094 9.5802 8.8832 8.2664 7.7184 7.2297 6.7921 6.3988 6.0442 5.4321 5.1668 4.9245 9.7066 8.9847 8.3481 7.7843 7.2829 6.8351 6.4338 6.0726 5.7465 5.4509 5.1822 4.9371 9.8226 9.0770 8.4217 7.8431 7.3300 6.8729 6.4641 6.0971 5.7662 5.4669 5.1951 4.9476 9.9290 9.1609 8.4881 7.8957 7.3717 6.9061 6.4906 6.1182 5.7831 5.4804 5.2060 4.9563 10.0266 9.2372 8.5478 7.9426 7.4086 6.9352 6.5135 6.1364 5.7975 5.4919 5.2151 4.9636 10.1161 9.3066 8.6016 7.9844 7.4412 6.9607 6.5335 6.1520 5.8099 5.5016 5.2228 4.9697 10.1983 9.3696 8.6501 8.0218 7.4701 6.9830 6.5509 6.1656 5.8204 5.5098 5.2292 4.9747 10.2737 9.4269 8.6938 8.0552 7.4957 7.0027 6.5660 6.1772 5.8294 5.5168 5.2347 4.9789 10.7574 9.7791 8.9511 8.2438 7.6344 7.1050 6.6418 6.2335 5.8713 5.5482 5.2582 4.9966 10.9617 9.9148 9.0417 8.3045 7.6752 7.1327 6.6605 6.2463 5.8801 5.5541 5.2623 4.9995 17 15.5623 11.2741 9.7632 18 16.3983 14.9920 13.7535 12.6593 11.6896 10.8276 10.0591 9.3719 19 7.8393 6.9380 5.8775 17.2260 18.0456 15.6785 16.3514 14.3238 14.8775 11.1581 11.4699 10.3356 10.5940 9.6036 9.8181 20 21 18.8570 15.4150 13.1339 13.5903 14.0292 14.4511 14.8568 11.7641 10.8355 10.0168 12.0853 12.4622 12.8212 13.1630 13.4886 13.7986 17.0112 17.6580 18.2922 22 19.6604 15.9369 12.0416 11.0612 10.2007 23 16.4436 10.3711 5.7234 20.4558 21.2434 11.2722 11.4693 24 18.9139 16.9355 15.2470 10.5288 12.3034 12.5504 12.7834 13.0032 25 17.4131 15.6221 14.0939 11.6536 19.5235 20.1210 10.6748 10.8100 26 17.8768 15.9828 143752 11.8258 22.0232 22.7952 23.5596 24.3164 27 20.7069 16.3296 14.6430 13.2105 10.9352 18.3270 18.7641 11.9867 12.1371 28 21.2813 14.8981 13.4062 11.0511 16.6631 16.9837 29 25.0658 21.8444 19.1885 15.1411 13.5907 12.2777 11.1584 30 25.8077 19.6004 17.2920 153725 13.7648 12.4090 11.2578 40 32.8347 22.3965 27.3555 31.4236 23.1148 17.1591 13.3317 19.7928 21.4822 15.0463 15.7619 11.9246 12.2335 50 39.1961 25.7298 18.2559 13.8007 RUN THE NUMBERS 01 The Needs-Based Approach to Life Insurance This worksheet provides a mechanism for estimating life insurance needs using the needs-based approach. The amounts needed for final expenses, income replacement, readjustment needs, debt repayment, college expenses, and other special needs are calculated and then reduced by funds available from government benefits and any current insurance or assets that could cover the need. This worksheet is also available on the Garman/Forgue companion website. Example Your Figures $12,000 +823,217 + +19,000 Factors Affecting Need 1. Final-expense needs Includes funeral, burial, travel, and other items of expense just prior to and after death 2. Income-replacement needs Multiply 75 percent of annual income* by the interest factor from Appendix A-4 that corresponds to the number of years that the income is to be replaced and the assumed after-tax, after-inflation rate of return. ($42,000 X 19.6004 for 30 years at a 3% rate of return) 3. Readjustment period needs To cover employment interruptions and possible education expenses for surviving spouse and dependents 4. Debt-repayment needs Provides repayment of short-term and installment debt, including credit cards and personal loans 5. College-expense needs To provide a fund to help meet college expenses of dependents 6. Other special needs 7. Subtotal (combined effects of items 1-6) 8. Government benefits Present value of Social Security survivor's benefits and other benefits. Multiply monthly benefit estimate by 12 and use Appendix A-4 for the number of years that benefits will be received and the same interest rate that was used in item 2. ($2,725 x 12 x 11.9379 for 15 years of benefits and a 3% rate of return) 9. Current insurance assets 10. Life insurance needed +10,000 + +75,000 +0 +$939,217 -390,369 -100,000 $448,848 *Seventy-five percent is used because about 25 percent of income is used for personal needs. Appendix A-4 Present Value of a Series of Equal Amounts (an Annuity of $1 Received at the End of Each Period) (Used to compute the Discounted Present Value of a Stream of Income Payments) n 2% 3% 5% 1% 0.9901 1 0.9804 0.9709 1.9135 4% 0.9615 1.8861 0.9524 1.8594 6% 0.9434 1.8334 7% 0.9346 1.8080 8% 0.9259 1.7833 2 1.9704 1.9416 3 2.9410 2.8839 2.6730 2.7751 3.6299 2.7232 3.5460 4 2.8286 3.7171 4.5797 3.9020 3.8077 4.7135 3.4651 4.2124 2.6243 3.3872 4.1002 2.5771 3.3121 3.9927 5 4,8534 4.4518 43295 6 5.7955 5.2421 5.0757 4.9173 4.7665 4.6229 5.4172 6.2303 7 6.7282 6.0021 5.7864 5.3893 5.2064 5.6014 6.4720 7.3255 8.1622 8 6.4632 5.9713 5.7466 5.5824 6.2098 6.8017 7.6517 8.5660 4.7988 7,0197 7.7861 6.7327 7.4353 9 7.1078 6.5152 6.2469 10 9.4713 8.9826 8.5302 8.1109 7.7217 7.3601 7.0236 6.7101 7.1390 11 10.3676 9.7868 9.2526 8.7605 8.3064 7.8869 7.4987 12 11.2551 10.5753 9.9540 9.3851 8.8633 8.3838 7.9427 7.5361 13 12.1337 11.3484 10.6350 9.9856 8.8527 7.9038 9.3936 9.8986 8.3577 8.7455 14 13.0037 12.1062 11.2961 10.5631 9.2950 8.2442 15 13.8651 12.8493 11.9379 11.1184 10.3797 9.7122 9.1079 8.5595 16 14.7179 10.8378 9.4466 13.5777 14.2919 12.5611 13.1661 11.6523 12.1657 10.1059 10.4773 8.8514 9.1216 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 0.9174 09091 0.9009 0.8929 0.8850 0.8772 0.8696 0.8621 0.8547 0.8475 0.8403 0.8333 1.7591 1.7355 1.7125 1.6901 1.6681 1.6467 1.6257 1.6052 1.5852 1.5656 1.5465 1.5278 2.5313 2.4869 2.4437 2.4018 2.3612 2.3216 2.2832 2.2459 2.2096 2.1743 2.1399 2.1065 3.2397 3.1699 3.1024 3.0373 2.9745 2.9137 2.8550 2.7982 2.7432 2.6901 2.6386 2.5887 3.8897 3.7908 3.6959 3.6048 3.5172 3.4331 3.3522 3.2743 3.1993 3.1272 3.0576 2.9906 4.4859 4.3553 4.2305 4.1114 3.9975 3.8887 3.7845 3.6847 3.5892 3.4976 3.4098 3.3255 5.0330 4.8684 4.7122 4.5638 4.4226 4.2883 4.1604 4.0386 3.9224 3.8115 3.7057 3.6046 5.5348 5.3349 5.1461 4.9676 4.6389 4.4873 43436 4.2072 4.0776 3.9544 3.8372 5.9952 5.7590 5.5370 5.3282 5.1317 4.9464 4.7716 4.6065 4.4506 4.3030 4.1633 4.0310 6.4177 6.1446 5.8892 5.6502 5.4262 5.2161 5.0188 4.8332 4.6586 4.4941 43389 4.1925 6.8052 6.4951 6.2065 5.9377 5.6869 5.4527 5.2337 5.0286 4.8364 4.6560 4.4865 4.3271 7.1607 6.8137 6.4924 6.1944 5.9176 5.6603 5.4206 5.1971 4.9884 4.7932 4.6105 4.4392 7.4869 7.1034 6.7499 6.4235 6.1218 5.8424 5.5831 5.3423 5.1183 4.9095 4.7147 4.5327 7.7862 7.3667 6.9819 6.6282 6.3025 6.0021 5.7245 5.4675 5.2293 5.0081 4.8023 4.6106 8.0607 7.6061 7.1909 6.8109 6.4624 6.1422 5.8474 5.5755 5.3242 5.0916 4.8759 4.6755 8.3126 7.8237 7.3792 6.9740 6.6039 6.2651 5.9542 5.6685 5.4053 5.1624 4.9377 4.7296 8.5436 8.0216 7.5488 7.1196 6.7291 6.3729 6.0472 5.7487 5.4746 5.2223 4.9897 4.7746 8.7556 8.2014 7.7016 7.2497 6.8399 6.4674 6.1280 5.8178 5.5339 5.2732 5.0333 4.8122 8.9501 8.3649 7.3658 6.5504 6.1982 5.5845 5.3162 5.0700 4.8435 9.1285 8.5136 7.9633 7.4694 7.0248 6.6231 6.2593 5.9288 5.6278 5.3527 5.1009 4.8696 9.2922 8.6487 8.0751 7.5620 7.1016 6.6870 6.3125 5.9731 5.6648 5.3837 5.1268 4.8913 9.4424 8.7715 8.1757 7.6446 7.1695 6.7429 6.3587 6.0113 5.6964 5.4099 5.1486 4.9094 9.5802 8.8832 8.2664 7.7184 7.2297 6.7921 6.3988 6.0442 5.4321 5.1668 4.9245 9.7066 8.9847 8.3481 7.7843 7.2829 6.8351 6.4338 6.0726 5.7465 5.4509 5.1822 4.9371 9.8226 9.0770 8.4217 7.8431 7.3300 6.8729 6.4641 6.0971 5.7662 5.4669 5.1951 4.9476 9.9290 9.1609 8.4881 7.8957 7.3717 6.9061 6.4906 6.1182 5.7831 5.4804 5.2060 4.9563 10.0266 9.2372 8.5478 7.9426 7.4086 6.9352 6.5135 6.1364 5.7975 5.4919 5.2151 4.9636 10.1161 9.3066 8.6016 7.9844 7.4412 6.9607 6.5335 6.1520 5.8099 5.5016 5.2228 4.9697 10.1983 9.3696 8.6501 8.0218 7.4701 6.9830 6.5509 6.1656 5.8204 5.5098 5.2292 4.9747 10.2737 9.4269 8.6938 8.0552 7.4957 7.0027 6.5660 6.1772 5.8294 5.5168 5.2347 4.9789 10.7574 9.7791 8.9511 8.2438 7.6344 7.1050 6.6418 6.2335 5.8713 5.5482 5.2582 4.9966 10.9617 9.9148 9.0417 8.3045 7.6752 7.1327 6.6605 6.2463 5.8801 5.5541 5.2623 4.9995 17 15.5623 11.2741 9.7632 18 16.3983 14.9920 13.7535 12.6593 11.6896 10.8276 10.0591 9.3719 19 7.8393 6.9380 5.8775 17.2260 18.0456 15.6785 16.3514 14.3238 14.8775 11.1581 11.4699 10.3356 10.5940 9.6036 9.8181 20 21 18.8570 15.4150 13.1339 13.5903 14.0292 14.4511 14.8568 11.7641 10.8355 10.0168 12.0853 12.4622 12.8212 13.1630 13.4886 13.7986 17.0112 17.6580 18.2922 22 19.6604 15.9369 12.0416 11.0612 10.2007 23 16.4436 10.3711 5.7234 20.4558 21.2434 11.2722 11.4693 24 18.9139 16.9355 15.2470 10.5288 12.3034 12.5504 12.7834 13.0032 25 17.4131 15.6221 14.0939 11.6536 19.5235 20.1210 10.6748 10.8100 26 17.8768 15.9828 143752 11.8258 22.0232 22.7952 23.5596 24.3164 27 20.7069 16.3296 14.6430 13.2105 10.9352 18.3270 18.7641 11.9867 12.1371 28 21.2813 14.8981 13.4062 11.0511 16.6631 16.9837 29 25.0658 21.8444 19.1885 15.1411 13.5907 12.2777 11.1584 30 25.8077 19.6004 17.2920 153725 13.7648 12.4090 11.2578 40 32.8347 22.3965 27.3555 31.4236 23.1148 17.1591 13.3317 19.7928 21.4822 15.0463 15.7619 11.9246 12.2335 50 39.1961 25.7298 18.2559 13.8007