Sue and Tom Wright

Sue and Tom Wright have been married for 14 years and have two children. Sue is 37 years of age, and Tom is 35. Their two children, Mike and Karen, are ages 13 and 11 respectively. Sue works as a retail account manager where her net wages are $40,000. Tom works as a delivery service driver where his after-tax wages are $27,000. Should either die, they have decided that the survivor will continue to work full time in their present positions. The Wrights are currently in the 25% marginal tax bracket. Were either one to die, they estimate that the remaining family members would need about 80% of their present combined take-home pay to maintain their current standard of living (after the youngest leaves home, each feels that they could survive on their own salary until retirement age without any additional supplement). However, if either dies, they want to pay off the mortgage balance remaining on the house to ensure the survivor does not have to move while the children are still living at home. They have also decided that they also want to pay off the balances owed on the Camry and the Capital One Visa so the survivor will have more cash flow available to live on.According to the Social Security Administration, Sues Social Security survivor benefits would total about $12,000 annually in todays dollars. Toms Social Security survivor benefits would total about $8,100 per year in todays dollars. Based on an analysis of their past income statements, the Wrights believe that the survivor should be able to make ends meet on the survivors salary alone once Karen (their youngest child) leaves home to attend college at her age 18. As a result, their maintenance fund is designed to last until that time.Both Tom and Sue are knowledgeable investors. For the purposes of being conservative, they will assume average after-tax returns on their investment portfolio of 7% going forward into the future. They will also operate under the assumption that inflation will average 4% indefinitely into the future, 1/3 higher than the historical 3% average rate. The Wrights will assume that should one of them die tomorrow, funeral and burial costs would be about $8,000. They estimate attorneys costs to close the survivors estate to be another $6,000. As far as specialized funds are concerned, the Wrights would like to leave the survivor with an emergency cash fund capable of replacing six months of living expenses. They believe that each has a sufficiently generous defined benefit retirement program at work that there will be no need to supplement the survivors pension by purchasing additional life insurance. Based on their research, they have determined that they will need to have $70,000 on hand to cover four years of tuition and costs of living at a 4-year, public, in-state university when Mike is ready to begin college five years from now. They will need about $77,000 to cover the same 4-year package of expenses when Karen is ready to begin college two years later. In determining how much they will need to set aside today to fund these future expenses, assume that the survivor will continue to be able to generate 7% after-tax rate of return on their investments.In calculating the Wrights available resources, assume that the survivor will keep only one car, both IRAs are traditional IRAs and further assume that $50,000 of life insurance currently exists on Toms life and $200,000 exists on Sues life.

1. Are the Wrights adequately insured in the event of Toms immediate death? If not, how much additional life insurance should be purchased on his life?

2. Are the Wrights adequately insured in the event of Sues immediate death? If not, how much additional life insurance should be purchased on her life?

3. How much additional insurance does the family need? Of what type?