Life Insurance Needs for a Young Married Couple. Amy and Mack Holly from Rapid City, South Dakota, have been married for three years. They recently bought a home costing $212,000 using a $190,000 mortgage. They have no other debts. Mack earns $62,000 per year, and Amy earns $71,000. Each has a retirement plan valued at approximately $20,000. They recently received an offer in the mail from their mortgage lender for a mortgage life insurance policy of $190,000. Their only life insurance currently is a $20,000 cash-value survivorship joint life policy. They each would like to provide the other with support for at least five years if one of them should die.

(a) Assuming $15,000 in final expenses and $20,000 allocated to help make mortgage payments, calculate the amount of life insurance they should purchase using the needs-based approach.

Needs-Based Approach to Life Insurance Factors Affecting Need Amy Mack Final-expense needs N = 5 N = 5 I/Y=3 I/Y = 3 Income-replacement needs PV = CPT PMT = 71,000 x 0.75 PV = CPT PMT = 62,000 x 0.75 FV = 0 FV = 0 Readjustment period needs Debt-repayment needs College-expense needs Other special needs: Mortgage payments Subtotal: Government benefits Current insurance assets: Home Life insurance cash value Retirement plan Subtotal: Life insurance needed