Harry and Belinda Johnson spend $20 per month on life insurance in the form of a premium on a $10,000, 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 $100,000 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 4 percent rate of return after taxes and inflation. They also estimate the following expenses: $15,000 for final expenses, $20,000 for readjustment expenses, and $5,000 for repayment of short-term debts.

REQUIRED:

1. Should the $3,000 interest earnings from Harry's trust fund be included in his annual income for the purposes of calculating the dollar loss if he were to die? Explain your response.

2. Based on your response to the previous question, how much more life insurance does Harry need? Next repeat the calculations to arrive at the additional life insurance needed on Belinda's life. (Use the Run the Numbers worksheet)

3. How might the Johnsons most economically meet any additional life insurance needs you have determined they may have?

4. In addition to their life insurance planning, how might the Johnsons begin to prepare for their retirement years?

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. (542,000 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 n 1% 2% 3% 4% 5% 6% 7% 8% 1 0.9901 0.9804 0.9709 0.9615 0.9524 0.9434 0.9346 0.9259 2 1.9704 1.9416 1.9135 1.8861 1.8594 1.8334 1.8080 1.7833 3 2.9410 2.8839 2.8286 2.7751 2.7232 2.6730 2.6243 2.5771 4. 3.9020 3.8077 3.7171 3.6299 3.5460 3.4651 3.3872 3.3121 5 4.8534 4.7135 4.5797 4.4518 4.3295 4.2124 4.1002 3.9927 6 5.7955 5.6014 5.4172 5.2421 5.0757 4.9173 4.7665 4.6229 7 6.7282 6.4720 6.2303 6.0021 5.7864 5.5824 5.3893 5.2064 8 7.6517 7.3255 7.0197 6.7327 6.4632 6.2098 5.9713 5.7466 9 8.5660 8.1622 7.7861 7.4353 7.1078 6.8017 6.5152 6.2469 10 9.4713 8.9826 8.5302 8.1109 7.7217 7.3601 7.0236 6.7101 11 10.3676 9.7868 9.2526 8.7605 8.3064 7.8869 7.4987 7.1390 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 9.3936 8.8527 8.3577 7.9038 14 13.0037 12. 1062 11.2961 10.5631 9.8986 9.2950 8.7455 8.2442 15 13.8651 12.8493 11.9379 11.1184 10.3797 9.7122 9. 1079 8.5595 16 14.7179 13.5777 12.5611 11.6523 10.8378 10.1059 9.4466 8.8514 17 15.5623 14.2919 13.1661 12.1657 11.2741 10.4773 9.7632 9.1216 18 16.3983 14.9920 13.7535 12.6593 11.6896 10.8276 10.0591 9.3719 19 17.2260 15.6785 14.3238 13. 1339 12.0853 11.1581 10.3356 9.6036 20 18.0456 16.3514 14.8775 13.5903 12.4622 11.4699 10.5940 9.8181 21 18.8570 17.0112 15,4150 14.0292 12.8212 11.7641 10.8355 10.0168 22 19.6604 17.6580 15.9369 14.4511 13.1630 12.0416 11.0612 10.2007 23 20.4558 18.2922 16.4436 14.8568 13.4886 12.3034 11.2722 10.3711 24 21.2434 18.9139 16.9355 15.2470 13.7986 12.5504 11.4693 10.5288 25 22.0232 19.5235 17.4131 15.6221 14.0939 12.7834 11.6536 10.6748 26 22.7952 20.1210 17.8768 15.9828 14.3752 13.0032 11.8258 10.8100 27 23.5596 20.7069 18.3270 16.3296 14.6430 13.2105 11.9867 10.9352 28 24.3164 21.2813 18.7641 16.6631 14.8981 13.4062 12.1371 11.0511 29 25.0658 21.8444 19.1885 16.9837 15.1411 13.5907 12.2777 11.1584 30 25.8077 22.3965 19.6004 17.2920 15.3725 13.7648 12.4090 11.2578