John and Sarah, are both aged 35; married with 3 small children. Julie age 10, June age 8, and Justine age 3. They want to ensure that they have adequate resources in place to complete their estate plans, should John pass away prematurely.
Consider their current resources and expressed needs as noted below. What is an appropriate amount of life insurance they should consider?
Needs
• Pay final expenses of $18,000
• Repay credit card debt of $12,000
• Repay mortgage on the family home of $280,000
• Repay car loan of $15,000
• Establish an educational fund of $50,000 for the children
• Charitable bequest of $20,000
Current Resources / Assets
• Cash in the savings account of $5,000.
• Group insurance on John’s life of $75,000
• Spousal group insurance on Jenny’s life of $40,000
• If John passes away, Sarah will start to work as a teacher and will earn $55,000 per year.
She will participate in the teacher’s pension plan until age 60, at which time her pension will be approximately $24,000 per year.
Objectives
They want to maintain the family income at $90,000 per year while the children are minors(18), then $65,000 until Jenny’s retirement at age 60, and $50,000 thereafter. They are assuming Sarah will live to age 90. For planning purposes, they have chosen to disregard any provisions for government-sponsored benefits arising from premature death and any tax deductions for Sarah.

Required

1. What is the immediate net cash position after paying final expenses?

2. If they were to also repay their debts and cover other lump-sum needs, how much additional liquid cash would be required?

3. With respect to their long-term income needs, what is the annual income shortfall in each of the periods identified? Hint: Refer to the objectives above.

4. It has been determined that on average there will be a shortfall of $2,000 per month in ongoing income to meet all the long-term income needs. They
do not want to use up any capital, only the earnings on that capital, to cover the shortfall. How much capital would be required to cover this shortfall if they could get an investment return of 4% per year on the capital?

5. Using the information from questions 1, 2, and 4, what is the additional amount of insurance on John’s life that would be required to meet the family’s
objectives?

6. What type of insurance and in what amounts would you recommend? Provide an explanation to justify each of your recommendations.