John (45) and Sarah (43) are the married parents of young children (ages 7 and 9). John is a self employed C.P.A. with a salary of $150,000. Sarah is a teacher and has been at her job for 20 years making $110,000/year. John and Sarah have different levels of risk tolerance. John tends to be a riskier investor and Sarah is by far more conservative. The family has no outstanding debt outside of a mortgage on their primary residence. The outstanding mortgage balance totals $250,000 against a fair market value of the home of $500,000. Their liquid assets consist of jointly held bank deposits ($15,000), mutual fund ($1,755,000) and combined retirement assets of $400,000 (Sarah $195,000 and John $205,000). Neither carries any life insurance.

The family spends roughly 37% of their joint salary on taxes, etc with the remainder used to provide for their family. They plan to retire at age 67. Assume a 5% opportunity cost in any analysis.

Sarah and John's goals are to provide enough life insurance in the event of their deaths to provide for their children to age 18 and to provide some funds for their college education ($300,000 in total for both kids). In the event of the premature death of either spouse they would like to provide their dependents with an annual income of $60,000. Both Sarah and John would be eligible for social security survivorship benefits-- assuming $50,000/year (includes both children and surviving spouse).

1. Calculate the amount of insurance they should obtain given their personal information and goals as noted above using the needs approach, taking into account: (1) Estate clearance fund; (2) Readjustment fund; (3) Dependency period; (4); Life insurance to surviving spouse; and (5) Special needs funds.

How much additional insurance is needed using the needs approach?