Life Insurance Needs Analysis Case

Your friend John asks you for advice concerning life insurance.John is 34 years old and graduated from law school last year.He currently earns $24,000 per year as a waiter, but is looking for a position with a local law firm.John is married and has one child, Billy, age 10.John's wife, Mary, is a professor who currently earns $58,000 per year.Mary is 32 years old.John and Mary pay $1,200 per month for their home mortgage, which will be paid off in 20 years.The interest rate on their mortgage is 6.5%.(Their current equity in the home is $50,000.)The couple owns two cars, both 8 years old, and personal property (such as clothes, electronics, furniture, etc.) valued at $35,000.Their investments include checking, savings, and mutual fund accounts equal to $10,000.John has no life insurance.Mary has $150,000 of life insurance provided by her employer.Mary's pension plus social security are expected to total $45,000 per year, beginning when she is 65 years old.If John should die, Mary would receive approximately $10,000 per year from social security until Billy reaches age 18.

John and Mary spend most of their current income, although they do try to save about $50 per month.Their investments earn approximately 5% per year.Their only existing debt is their home mortgage.Given that John and Mary both enjoy flexible work schedules, they are able to raise Billy without the help of a babysitter or nanny.John picks up Billy from school on Tuesdays and Thursdays and Mary picks him up on Mondays, Wednesdays and Fridays.However, John and Mary want to have another child next year and expect Mary to take one year off from work.

John is worried about what may happen to his family is he should die.He is considering the purchase of life insurance and asks your advice.Assuming neither John nor Mary will receive large inheritances, how much life insurance do you think John needs on his life?(Use the needs approach.)Show all calculations and explain your answer.Make any assumptions you believe are reasonable, and make sure your assumptions are clearly stated.Also indicate the type of insurance you would recommend, whole life or term, and explain why.