Posted: June 3rd, 2024

Insurance Homework

Question description

Question 1: (Needs Approach)
The correct answers are based on the set of facts and tables provided
below. All the data you need to perform the necessary calculations are
contained in the tables following the three paragraphs below. Show all
your calculations so you can receive partial credit even if you make a
mistake. The appearance of your homework is a factor in your grade;
therefore, it is suggested it be presented in a professional manner
(i.e. pretend it is like something you would prepare for your boss).
Pat and Mandy are married and have a son, Steve, age 8. Mandy, age 29,
earns $40,000 annually from her job. Pat, age 31, earns $50,000
annually from his job. Assume that Pat will die before Mandy. The
family wants to ensure that they have adequate life insurance on Pat to
cover their cash and income needs if Pat dies. Hence, they want to
determine if they should purchase additional life insurance on Pat to
cover these needs using Needs Approach. (you may find some hints from
your textbook, page 214)
The tables below provide figures on their: 1) cash needs; 2) present
insurance and financial assets; 3) income needs; and 4) income that the
family will receive if no additional life insurance is purchased. Use
the values in these tables to determine how much, if any, additional
life insurance the family should purchase on Pat to cover their needs.
In your answer, calculate and show the components of any additional life
insurance needed in terms of cash needs and income needs and the total
amount of additional life insurance needed.
This exercise assumes that 1) Pat dies immediately; 2) Mandy continues
to work if Pat dies. However, her earnings are not enough to meet their
needs. So, the figures provided in the table are net of her earnings; 3)
Mandy plans to retire at age 65; and 4) the life insurance proceeds are
invested at an interest rate equal to the rate of inflation (so, you do
not have to worry about time-value of money issues).
Cash Needs:
Estate Clearance $15,000
Mortgage Redemption $150,000
Emergency fund $20,000
Educational Fund $100,000
Present Insurance and Financial Assets:
Whole Life Insurance $150,000
Investments/Savings $10,000
Income Needs:
Readjustment Period $5,000 monthly for 2 years
Dependency Period $5,000 monthly for 8 years
Blackout Period $3,500 monthly for 28 years
Mandy's Retirement Period $3,500 monthly for 25 years
Expected Income from Sources Other than Life Insurance:
Readjustment Period $3,500 monthly for 2 years
Dependency Period $3,500 monthly for 8 years
Blackout Period $3,000 monthly for 28 years
Mandy's Retirement Period $2,000 monthly for 25 years
Question 2: (Capital Retention Approach)
Pat estimates that $60,000 is seen as sufficient wealth to meet his
family’s needs after his death. Currently, the family has $800,000
total assets, including bank saving, securities investment, house, cars,
etc. The family currently has $220,000 total liability (e.g., mortgage
payoff, auto loan, credit card balance), $135,000 cash needs (e.g.,
emergency fund, educational fund, and final expenses), and $145,000
non-income-producing capital. Ignore any other potential capital
resources or needs, e.g., Social Security benefits.
Assuming a 5% rate of return, how much life insurance does the
Capital Retention Approach suggest? (You may find some hints from your
textbook, page 217). Again, please show all your work and calculations
so you can receive partial credit even if you make a mistake. The
appearance of your homework is a factor in your grade; therefore, it is
suggested it be presented in a professional manner.)
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