How much life insurance do you need? Calculating resources- Part 2

Sam and Teresa Cho have completed Step 1 of their needs analysis worksheet and determined that they need $3,522,000 to maintain the projected lifestyle of Teresa (age 38) and their two children (ages 8 and 10) in the event of Sams (the primary earners) death. The Chos also have certain financial resources available after Sams death, however, so their life insurance needs are lower than this amount.

If Sam dies, Teresa will be eligible to receive Social Security survivors benefitsapproximately $3,800 a month ($45,600 a year) until the youngest child graduates from high school in 10 years. After the children leave home, Teresa will be able to work full-time and earn an estimated $38,000 a year (after taxes) until she retires at age 65. After Teresa turns 65, shell receive approximately $3,200 a month ($38,400 a year) from her own Social Security and retirement benefits. The life expectancy for a woman within Teresas demographic is 87. The couple has also saved $60,000 in a mutual fund, and Sams employer provides him a $100,000 life insurance policy.

Using this information, complete Step 2 of the needs analysis worksheet to estimate their total financial resources available after death. (Note: If the value of a certain entry is zero, be sure to enter 0 to receive credit.)

Life Insurance Needs Analysis Worksheet (Part 2)

Step 2: Financial Resources Available After Death
1. Income
	Period 1	Period 2	Period 3
a. Annual Social Security survivors benefits	$45,600	$0	$0
b. Surviving spouses annual income	$0		$0
c. Other annual pensions and Social Security benefits	$0	$0	$38,400
d. Annual income (1a + 1b + 1c)	$45,600
e. Number of years in time period	10	17	22
f. Total period income (1d x 1e)	$456,000
g. Total income				$1,946,800
2. Savings and investments
3. Other life insurance
4. Other resources				$0
Total financial resources available (1g + 2 + 3 + 4):				$2,106,800

Finally, to determine the value of life insurance Sam and Teresa should purchase, complete Step 3 of the needs analysis method by subtracting the total financial resources available from the total financial resources needed.

Step 3: Additional Life Insurance Needed
Total financial resources needed (from Step 1)	$3,522,000
Total financial resources available (from Step 2)	$2,106,800
Additional life insurance needed:

True or False: Alternatively, the Chos could have estimated their life insurance needs using the multiple-of-earnings method, a more complicated but more accurate method than the needs analysis.

False

True