Worksheet 8.1

Chapter 8 Critical Thinking Case 2 The Jennings Want to know: How Much Is Enough? Darrell and Lena Jennings are a two-income couple in their early 30s. They have two children, ages 6 and 3. Darrell's monthly take-home pay is $3,600, and Lena's is $4,200. The Jennings feel that, because they're 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, they'd like to set up an education fund for their children in the amount of $120,000 to provide college funds of $15,000 a year - in today's dollars - for 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 $210,000 mortgage on their house. They estimate that they have $25,000 in consumer installment loans and credit cards. They also project that if either of them dies, the other probably will be left with about $10,000 in final estate and burial expenses. Regarding their annual income needs, Darrell and Lena 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 Darrell nor Lena would be eligible for Social Security survivor's benefits because they both intend to continue working, both children would qualify in the combined) amount of around $1,800 a month. The Jennings have amassed about $75,000 in investments, and they have a decreasing term life policy on each other in the amount of $100,000, which could be used to partially pay off the mortgage. Darrell also has an $80,000 group policy at work and Lena a $100,000 group policy. 1. Assume that Darrell's gross annual income is $54,000 and Lena's is $60,000. 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 Darrell and 7.4 for Lena. Use this approach to find the amount of life insurance each should have if they want to replace 75 percent of their lost earnings. Life insurance needed by Darrell: $ Life insurance needed by Lena: $ 2. Use Worksheet 8.1 to find the additional insurance needed on both Darrell's and Lena's lives. (Because Darrell and Lena hold secure, well-paying jobs, both agree that they won't need any additional help once the kids are grown; both also agree that they'll 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.) Additional insurance needed by Darrell $ Additional insurance needed by Lena $ 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 Jennings' life insurance needs? Using the amounts computed in Question 2 (employing the needs approach), what kind of life insurance policy would you recommend for Darrell? For Lena? Briefly explain your answers. blank Period 3 LIFE INSURANCE NEEDS ANALYSIS METHOD insured's Name Step 1: Estimate the total economic resources needed 1. Annual living expenses and other needs: Period 1 Period 2 a Monthly living expenses S b. Net yearly income needed $ llax 12) c. Number of years in time period d. Total living need per time period bxc $ TOTAL LIVING EXPENSES (add lined for each period): 2. Special needs a. Spouse education fund b. Children's college fund c. Other needs 3. Final expenses (funeral, estate costs, etc.) 4. Debt liquidation a. House mortgage b. Other loans c. Total debt (4 a +4b) 5. Other financial needs TOTAL INCOME NEEDS (add right column) Step 2: Financial resources available after death 1. Income Period 1 Period 2 Period 3 $ - $ - $ . 0 0 0 a. Annual Social Security survivor benefits b. Surviving spouse's annual income c. Other annual pensions and Soc. Sec. benefits d. Annual income e Number of years in time period 1. Total period income (dxel TOTAL INCOME 2. Savings and investments 3. Other life insurance 4. Other resources TOTAL RESOURCES AVAILABLE 1R+2+3+4) $ - $ - $- Step 3: Subtract available resources (Step 2) from the amount needed (Step 1) Step 1: Total income needs Step 2: Available resources ADDITIONAL LIFE INSURANCE NEEDED Chapter 8 Critical Thinking Case 2 The Jennings Want to know: How Much Is Enough? Darrell and Lena Jennings are a two-income couple in their early 30s. They have two children, ages 6 and 3. Darrell's monthly take-home pay is $3,600, and Lena's is $4,200. The Jennings feel that, because they're 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, they'd like to set up an education fund for their children in the amount of $120,000 to provide college funds of $15,000 a year - in today's dollars - for 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 $210,000 mortgage on their house. They estimate that they have $25,000 in consumer installment loans and credit cards. They also project that if either of them dies, the other probably will be left with about $10,000 in final estate and burial expenses. Regarding their annual income needs, Darrell and Lena 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 Darrell nor Lena would be eligible for Social Security survivor's benefits because they both intend to continue working, both children would qualify in the combined) amount of around $1,800 a month. The Jennings have amassed about $75,000 in investments, and they have a decreasing term life policy on each other in the amount of $100,000, which could be used to partially pay off the mortgage. Darrell also has an $80,000 group policy at work and Lena a $100,000 group policy. 1. Assume that Darrell's gross annual income is $54,000 and Lena's is $60,000. 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 Darrell and 7.4 for Lena. Use this approach to find the amount of life insurance each should have if they want to replace 75 percent of their lost earnings. Life insurance needed by Darrell: $ Life insurance needed by Lena: $ 2. Use Worksheet 8.1 to find the additional insurance needed on both Darrell's and Lena's lives. (Because Darrell and Lena hold secure, well-paying jobs, both agree that they won't need any additional help once the kids are grown; both also agree that they'll 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.) Additional insurance needed by Darrell $ Additional insurance needed by Lena $ 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 Jennings' life insurance needs? Using the amounts computed in Question 2 (employing the needs approach), what kind of life insurance policy would you recommend for Darrell? For Lena? Briefly explain your answers. blank Period 3 LIFE INSURANCE NEEDS ANALYSIS METHOD insured's Name Step 1: Estimate the total economic resources needed 1. Annual living expenses and other needs: Period 1 Period 2 a Monthly living expenses S b. Net yearly income needed $ llax 12) c. Number of years in time period d. Total living need per time period bxc $ TOTAL LIVING EXPENSES (add lined for each period): 2. Special needs a. Spouse education fund b. Children's college fund c. Other needs 3. Final expenses (funeral, estate costs, etc.) 4. Debt liquidation a. House mortgage b. Other loans c. Total debt (4 a +4b) 5. Other financial needs TOTAL INCOME NEEDS (add right column) Step 2: Financial resources available after death 1. Income Period 1 Period 2 Period 3 $ - $ - $ . 0 0 0 a. Annual Social Security survivor benefits b. Surviving spouse's annual income c. Other annual pensions and Soc. Sec. benefits d. Annual income e Number of years in time period 1. Total period income (dxel TOTAL INCOME 2. Savings and investments 3. Other life insurance 4. Other resources TOTAL RESOURCES AVAILABLE 1R+2+3+4) $ - $ - $- Step 3: Subtract available resources (Step 2) from the amount needed (Step 1) Step 1: Total income needs Step 2: Available resources ADDITIONAL LIFE INSURANCE NEEDED