How Much Life Insurance Does a Family Need? Maria and Paolo Rossi are 37 years old and have one son, age 5 . Maria is the primary earner, making $87,000 per year. Paolo does not currently work, The Rossis have decided to use the needs-based approach to calculate the value of a life insurance policy that would provide for Paolo and their son in the event of Maria's death, The Rossis' Needs Final expenses They estimate that final expenses (such as funeral costs and estate taxes) would be $12,000. Income replacement The Rossis are cautious and decided to replace Maria's income for 28 years, when Paolo will be 65 . Assume that Paolo would invest the life insurance proceeds at a 2% after-tax, after-inflation rate of return. Even though Paolo would be eligible to recelve survivor's benefits when he reaches the age of _and then Social Security retirement benefits Readjustment period Before the birth of their son, Paolo worked as a mechanical engineer, but hiy knowledge and skills are now somewhat outdated. Therefore, the Rossis will include $30,000 for Paolo to go back to school. Debt repayment The Rossis have home improvements totalling $130,000 and an auto loan of $5,000, They have 15 years left on the mortgage on their home, but they have provided for its payment with Marla's replaced income. College expenses A college education at the local public university costs $35,000 today. They will use this figure in the needs assessment with the understanding that Paolo would invest the insurance proceeds. Using this information and the following table, complete the worksheet to determine how much Maria should insure her life for. Round your answers to the nearest dollac: Enter zero ( 0 ) in any rows for which there is no figure, For Soclal security survivor's bencfits or allowance for anv current insurance or assets, enter the dollar amount without a minus sign (although you will need to subtract these values fosm the subtotal when calculating life insurance needs). Present value of an Annuity Table \begin{tabular}{lllll} \hline \multicolumn{4}{l}{ Interest Factors } & \multicolumn{4}{l}{ Present Value of an Annuity } \\ \hline Years & 2% & 3% & 4% & 5% \\ 4 & 3.8077 & 3.7171 & 3.6299 & 3.5460 \\ 5 & 4.7135 & 4.5797 & 4.4518 & 4.3295 \\ 6 & 5.6014 & 5.4172 & 5.2421 & 5.0757 \\ 7 & 6.4720 & 6.2303 & 6.0021 & 5.7864 \\ 8 & 7.3255 & 7.0197 & 6.7327 & 6.4632 \\ 9 & 8.1622 & 7.7861 & 7.4353 & 7.1078 \\ 10 & 8.9826 & 8.5302 & 8.1109 & 7.7217 \\ 11 & 9.7868 & 9.2526 & 8.7605 & 8.3064 \\ 12 & 10.5753 & 9.9540 & 9.3851 & 8.8633 \\ 13 & 11.3484 & 10.6350 & 9.9856 & 9.3936 \\ 14 & 12.1062 & 11.2961 & 10.5631 & 9.8986 \\ 15 & 12.8493 & 11.9379 & 11.1184 & 10.3797 \\ 16 & 13.5777 & 12.5611 & 11.6523 & 10.8378 \\ 17 & 14.2919 & 13.1661 & 12.1657 & 11.2741 \\ 18 & 14.9920 & 13.7535 & 12.6593 & 11.6896 \\ 19 & 15.6785 & 14.3238 & 13.1339 & 12.0853 \\ 20 & 16.0514 & 14.8775 & 13.5903 & 12.4522 \\ 21 & 17.0112 & 15.4150 & 14.0292 & 12.8212 \\ 22 & 17.6580 & 15.9369 & 14.4511 & 13.1630 \\ \hline \end{tabular} \begin{tabular}{lllll} 17 & 14.2919 & 13.1661 & 12.1657 & 11.2741 \\ 18 & 14.9920 & 13.7535 & 12.6593 & 11.6896 \\ 19 & 15.6785 & 14.3238 & 13.1339 & 12.0853 \\ 20 & 16.3514 & 14.8775 & 13.5903 & 12.4622 \\ 21 & 17.0112 & 15.4150 & 14.0292 & 12.8212 \\ 22 & 17.6580 & 15.9369 & 14.4511 & 13.1630 \\ 23 & 18.2922 & 16.4436 & 14.8568 & 13.4886 \\ 24 & 18.9139 & 16.9355 & 15.2470 & 13.7986 \\ 25 & 19.5235 & 17.4131 & 15.6221 & 14.0939 \\ 26 & 20.1210 & 17.8768 & 15.9828 & 14.3752 \\ 27 & 20.7069 & 18.3270 & 16.3296 & 14.6430 \\ 28 & 21.2813 & 18.7641 & 16.6631 & 14.8981 \\ 29 & 21.8444 & 19.1885 & 16.9837 & 15.1411 \\ 30 & 22.3965 & 19.6004 & 17.2920 & 15.3725 \\ 40 & 27.3555 & 23.1148 & 19.7928 & 17.1591 \end{tabular} Factors Affecting Need 1. Final-expense needs Includes funeral, burial, travel, and other items of expense just prior to and after death The Rossis' Figures 2. Income-replacement needs Multiply 75% of annual income by the interest factor from the present value of an annuity table that corresponds to the number of years that the income is to be replaced and the assumed after-tax, after-inflation 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 home improvements and an auto loan 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. Less: Government benefits Present value of Social Security survivor's benefits and other benefits Multiply monthly benefit estimate by 12 , and use the present value of an annuity table for the number of years that benefits will be received and the same interest rate that was 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 home improvernents and an auto loan 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. Less: Government benefits Present value of Social Security survivor's benefits and other benefits Multiply monthly benefit estimate by 12 , and use the present value of an annuity table for the number of years that benefits will be received and the same interest rate that was used in item 2. 9. Less: Current insurance assets 10. Life insurance needs 75% is used because about 25% of income is used for personal needs