The Chua Wants to Know: How Much Is Enough? Mike Chua and Alice is a two-income couple in their early 30s. They have two children, ages 6 and 3. Mikes monthly take-home pay is RM3,600, and Alices is RM4,200. The Chua feel that, because theyre a two-income family, they both should have adequate life insurance coverage. Accordingly, they are now trying to decide how much life insurance each one of them needs. To begin with, theyd like to set up an education fund for their children in the amount of RM120,000 to provide college funds of RM15,000 a yearin todays dollarsfor four years for each child. Moreover, if either spouse should die, they want the surviving spouse to have the funds to pay off all outstanding debts, including the RM210,000 mortgage on their house. They estimate that they have RM25,000 in consumer installment loans and credit cards. They also project that if either of them dies, the other probably will be left with about RM10,000 in final estate and burial expenses. Regarding their annual income needs, Mike and Alice both feel strongly that each should have enough insurance to replace her or his respective current income level until the youngest child turns 18 (a period of 15 years). Although neither Mike nor Alice would be eligible for Social Security survivors benefits because they both intend to continue working, both children would qualify in the (combined) amount of around RM1,800 a month. The Chua have amassed about RM75,000 in investments, and they have a decreasing term life policy on each other in the amount of RM100,000, which could be used to partially pay off the mortgage. Mike also has an RM80,000 group policy at work and Alice a RM100,000 group policy. Critical Thinking Questions

1) Assume that Mikes gross annual income is RM54,000 and Alices is RM64,000. Their insurance agent has given them a multiple earnings table showing that the earnings multiple to replace 75 percent of their lost earnings is 8.7 for Mike and 7.4 for Alice. Use this approach to find the amount of life insurance each should have if they want to replace 75 percent of their lost earnings.

2) Use Worksheet 8.1 to find the additional insurance needed on both Mikes and Alices lives. (Because Mike and Alice hold secure, well-paying jobs, both agree that they wont need any additional help once the kids are grown; both also agree that theyll have plenty of income from Social Security and company pension benefits to take care of themselves in retirement. Thus, when preparing the worksheet, assume funding needs of zero in Periods 2 and 3).

3) Is there a difference in your answers to Questions 1 and 2? If so, why? Which number do you think is more indicative of the Chuas life insurance needs? Using the amounts computed in Question 2 (employing the needs approach), what kind of life insurance policy would you recommend for Mike? For Alice? Briefly explain your answers.

LIFE INSURANCE NEEDS A ALYSIS METHOD insured's Name n Rd Adele Man, Step 1: Fnanclal tesaurces needed after daatlh L. Annuai living expenses and ather needs a. Manthly Iving expenses Pe S 3,500S 3,000 2,750 S 42,000$ 36,000 $ 33,D00 .Net yearly income needed (a 12) umber of yeers in time period 12 8 d. | Totaf tiving need per time period (b ci : $ 504,000 | $ 648,000 | $ 728,000 TOTAL LIVING EXPENSES (add line d for each period); S 1,87B.000 2. Special needs Spouse education fund Children's college fun $26.0OO S75,000 c. Other needs .Final expenses (funeral, estate costs, etc.) 4. Debt liquidation a. House mortgage $ 15,000 $ 150,00:0 5,000 her loans c, i Total debt (4 aan 4 bl 5, Other financial needs 155,000 0 S 2,14B,000 add right column Step 2; Financial resources available after deatlh tIncome Period 1 Period2 l Pariod 3 $ 38,400 i Annual Social Security survivors 0 benefits $35.000 b. Surviving spouse's annual income c. Other annual pensionsand Social Security benefits Annuat income Number of years in time period Total period income fd X e) 0 27,000 38,400 | $ 35,000 | $ 27,000 i $ 460,800 $. 630,000 | $ 594,000 d i 12 18 TOTAL INCOME 2. Sevings and investments .Other life lnsurance S L5R4 6D0 65,000 S 100,000 Other resources TOTAL FINANCIAL RESOURCES AVAILABLE +2 3 4 1,849,800 w waa wawan-- Step 3: Additional Life lnsurence needed Step 1: Total financial resources,eeded 2.148,00o . 49800 Step 2: Total financial resources availatle ADDITIONAL LIFE INSURANCE NEEDED $ 29B,200