Your friend John asks you for advice concerning life insurance. John, an auto mechanic, is 36 years old and currently earns $70,000 per year. John is married and has three children, Billy, age 2. Cindy, age 6, and Sally, age 10. John's wife, Mary, is currently a stay at home mom. When Billy is old enough to attend school, Mary hopes to get a job as an administrative assistant in the children's school. That position pays about $20,000 per year. Mary has a high school diploma and a certificate showing she completed one year of practical secretarial training. Mary is 34 years old. John and Mary pay $800 per month for their home mortgage, which will be paid off in 20 years. The interest rate on their mortgage is 5.0%. (Their current equity in the home is $25,000.) The couple owns two cars, one is 10 years old and in relatively good condition. The other is new, and their car loan payments are $450 per month for the next 48 months. The interest rate on the car loan is 4%. The couple's personal property (such as clothes, electronics, furniture, etc.) is valued at $45,000. Their investments include checking, savings, and mutual fund accounts equal to $5,000. John has no life insurance. Mary has a $25,000 whole life insurance policy that was given to her by her parents when she turned 18. If John should die, Mary would receive approximately $5,000 per year for each child 18 years of age or younger from Social Security.

John and Mary spend almost all of John's take-home pay each month. They are able to save $100 per month that they deposit into a tax-deferred college fund for the children. The college fund has been earning a respectable rate of return of approximately 7% per year. The fund balance right now is $4,000. Their other investments earn approximately 5% per year.

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.

a. 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.

b. Assume that John and Mary purchase a whole life policy on John's life in the amount you determined in part a. (If the amount you determined is less than $200,000, assume an amount of $200,000.) Fifteen years later, John decides he doesn't want to make any more premium payments. Which non-forfeiture option would you recommend?

c. Assume that John and Mary purchase a whole life policy on John's life in the amount you determined in part a. (If the amount you determined is less than $200,000, assume an amount of $200,000.) John dies at age 60. Which settlement option would you recommend?Explain your selection and note any assumptions that you make.