Kevin, age forty-three and Patricia, age forty-one, are amarried couple with two children, ages eight and eleven. Kevin earns $120,000 annuallyas a marketing and sales managerfor a local firm. Patriciaearns

$32,000 annually as an administrative assistant with the local school district. She works only during the school term so she can be home with the childrenwhen they are on summer break.

Kevin and Patricia purchased their home ten years ago. It is currently valued at $309,000, with an outstanding mortgage of $142,500. They have one family car, valued at $27,500, which has an outstanding loan amount of $2,600. Kevins employer supplies him with a company car for which all expenses are paid.

Kevin is contributing to a retirement plan (called a 401(k)) sponsoredby his employer, who matcheshis contributions up to 5 percent. The current value of his tax-deferred contributions, employer contributions, and investment earnings is $232,000. Kevin also has a group universal life (GUL) policy through his employer in an amount equal to his salary ($120,000) and has purchased additional coverage up to two times his salary for a total of $240,000.

Patricia has a retirement plan with the school district that pays a specified benefit. Based on a retirement age of sixty-five, she would receive $392 monthly. If Patricia predeceases Kevin, he would be entitled to 50 percent of her monthly benefits starting at age sixty-five. The school district provides $15,000 in group insurance coverage to Patricia, and she has no other life insurance coverage. Kevin and Patricia are also both eligible to receive Social Security benefits in retirement.

The needs approach or the human life value approach can be used to determine whether Kevin and Patricia have sufficient life insurance in the event of theirpremature death. The agent has decided to usethe needs approach for Kevin and Patricia. To accomplish this, the agent evaluates the familys current financial situation, economic needs, and available resources, such as existing life insurance and retirement plans. If additional coverage is needed, types and sources of life insurance would be discussed.

Needs Analysis Steps Calculating Kevin and Patricias life-insurance needs entails several steps of analysis to determine cash needs in the event of Kevins premature death as well as the assets the couple has availableto meet thoseneeds.

Expense Needs

Although both Kevin and Patricia are employed, the first step in determining life insurance needs would focus on Kevin as the primary wage earner in the family. This process entails review of the familys cash needs, such as ongoing living expenses, outstanding debt, and funding for the childrens education, as well as final expenses that would arise in the event of Kevins premature death. The same process would then be used to determine the familys cash needs in the event of Patricias premature death.

The goal of this review is to determine how much money will be required to maintain the familys current standard of living should Kevin die prematurely. In this case, it is assumed that Patricia would continue to work in her current job with the same retirement benefits and that she would also receive Social Security benefits at retirement age. If Patricia planned to change jobs in the event of Kevins premature death, the expense need projections would be adjusted. Patricias current employment allows the family to avoid child-care expenses because her hours match those of the childrens school hours and she is home during summer vacation. If she were to change to a job that had longer hours and required her to work during the summer, the needs calculation would have to reflect additional child care expenses.

FinalExpenses Needs

Funeral costs $ 9,500

Estate settlement 7,500

Federal taxes0State taxes0Total Final Expenses$17,000

Debt Elimination Needs

Satisfy outstanding mortgage(s)

$142,500

Fund childrens education175,000Eliminate outstanding credit card debt3,750Eliminate outstanding car loan2,600Total Debt Elimination Needs$323,850Familys Living Expenses Needs Household maintenance expenses

$150,000

Other livingexpenses$200,000Child care expenses$ 0Total Family LivingExpenses Needs$350,000

Special Needs

The next step would involve considering whether the family has any expenses related to special needs in addition to maintaining its current standard of living. Such expenses could include gifts to charitable institutions or establishment of a trust. Kevin and Patricias only special need is establishing an emergency fund that would cover any unanticipated expenses following Kevins premature death. This amount is determined to be $25,000.

Retirement Income Needs

After the familys living expense needs are calculated, it is necessary to consider how much income Patricia would need in retirement. This calculation is based on her age at Kevins death and other sources of retirement income, including her defined benefit pension plan and Social Security benefits. Much of Kevin and Patriciascurrent funding for retirement is based on Kevins 401(k) proceeds. In the event of his premature death, Patricia would need to supplement her retirement income to cover all of her living expenses.This amount is determined to be $350,000.

Total Needs

The final step of the needs approach is adding all of the calculated expense needs to determine the total dollar amountrequired to meet monthly, ongoing,special, and retirement income needs. This amount will form the basis for determining whether Kevin is carrying a sufficient amount of life insurance or whether additional life insurance shouldbe purchased.

Total Needs Final expense needs$ 17,000Debt elimination needs$ 323,850Family living expenses needs$ 350,000Special needs$ 25,000Retirement income needs$ 350,000Total Needs$1,065,850

Assets Available

After all of Kevin and Patricias needs have been reviewed and calculated, the next step is to determine the dollar amount of assets that are available to meet these needs. These available assets include Kevins group life coverage, his retirement account, and benefits that would be paid by Social Security. Patricia would not receive survivors benefits under Kevins Social Security until she reaches retirement age. Social Security will, however,pay monthly survivors benefits to the children until they turn eighteen (in most cases).

Available Assets Group lifeinsurance$ 240,000Checking andsavings accounts$ 11,000Social Security survivors benefits$ 335,000Retirement account$ 232,000Total Assets$ 818,000

Total Life Insurance Needs

After all of the familys expenseneeds have been identified and compared to the available assets, the insurance professional would be ready to advise Kevin and Patricia regarding the adequacy of their current life insurance program. Based on the total needs of $1,065,000 and available assets to meet those needs of $818,000, there is a shortfall of $247,000.

Total Life Insurance Needs Total needs$1,065,000Minus total assets$ 818,000Additional Life Insurance Needed$ 247,000

Recommendations

Based on this review,it is suggested that Kevinshould purchase at least an additional $247,000of life insurance. The insurance professional would give advice and explain several options available to the familybut the customermakes the final decision.

Types and Sources of Life Insurance

One option would be for the family to purchase an individual term life policy for $250,000 from a private life insurer. This would be a cost-effective method to closethe current gap in assets requiredto meet the familys needs in the event of Kevins premature death.

Another option may be a combination of group universal life and individual term life. If his employer- sponsored group life plan allows it, Kevin could purchase an additional $120,000 increment under that plan and purchase the remaining amount from a life insurer under an individual term policy. The advantage of purchasing additional universal life insurance is that it provides permanent coverage (as long as Kevin is employed) and builds cash value. Term coverage is temporary but generally less costly than a universal policy. A $250,000 ten-year term policy would also cover the majority of the familys temporaryneeds, such as the childrens futureeducation and the mortgage elimination needs.

Because these needs will change over time, it is important to periodically conduct a needs approach review as the familys situation changes. This review would also include an evaluation of the familys needs in the event of Patricias premature death.

Questions -

1. Based on the facts presented in this case,what is the impact of premature death on this family?
2. What are the familys life insurance needs?
3. What amountand what type of policies, if any,should be purchased?

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