Chapter 9, Problem 1DC2

Summary Introduction

Case summary:

Mrs. W and Mr. F, 30 and 35, are considering the purchase of life insurance. Mr. F has a $150,000 group policy at work. Mrs. W earns $28,000 from part time. Mr. F annual salary is $55,000. From their income, they save $7,500 a year. The couple estimates that the children will be financially dependent except for college costs, for about another 15 year. Once the children are in college, Mrs. W assumes their annual expenses will be $60,000.they also anticipate, should Mr. F die, that Mrs. W will receive $8,000 a year in social security survivor benefits until the youngest child turn 18 and $5,000 annually in pension benefits until Mrs. W turns 80. Mrs. W projects her gross annual income to be $40,000 after her business expansion. She wants to plan on $30,000 a year in retirement income for another 20 years. She anticipates receiving a 5% after tax, after inflation return on their investment. To date, the K has accumulated a total of $107,000 of assets. Their assets include $10,000 in an emergency fund, $12,000 in IRA funds for Mrs. W, $35,000 in other investments and $50,000 in Mr. F’s 401(k) plan through his employer.

Character in this case:

Mr. F and Mrs. W.

Adequate information:

Immediate needs at death $25,000

Outstanding debt $90,000

Transitional fund $15,000

College expenses $205,000

To calculate:

The amount of additional life insurance needed.

Introduction:

Life insurance refers to the arrangement where an organization provides a guarantee to pay for the death of the insured person to support the dependents behind him in exchange of for some annual installments called premiums.