Reference no: EM131159217

Needs for Life Insurance

Rudy and Karyn also have questions about life insurance for you. Currently, they each are paying premiums for $100,000 of life insurance offered through their employer. They are listed as the primary beneficiary on each other’s policies and their 2 kids, Kelsey and Jacob, are listed as the contingent beneficiaries. Listed below is the information that you have gathered from them:

Yearly Income: $80,000 each (Household income $160,000)

Yearly Household expenses (including emergency & retirement savings): $125,000

$15,000 in credit card debt

$300,000 total in current savings

Future expected Expenses:

$100,000 for each child for college expenses

$150,000 in remaining mortgage debt on house

Problem 1 : Based on the income method, what is the total amount of insurance that Rudy and Karyn would need to cover their survivors’ income needs for 5 years? For 10 years? Assume this is for the children if they both were to die together in an accident. (Hint: the income method is based solely on income; expenses and debts or plans to spend “specifics” are disregarded under this method. Read Madura text p. 384 to get oriented to do this and remember that the purchase of life insurance is to cover the loss of earnings so that when buying we need to decide how many years of earnings loss we want to replace.)

Solution/Final Recommendation:

Gross yearly income of Rudy and Karyn= $80,000

So for 5 years insurance amount= Current gross income X number of years

$80,000 X 5years= For 5 years insurance amount = $400,000

For 10 Years insurance amount required= Current gross income X number of years

$80,000 X 10years= For 10 Years insurance amount= $800,000

Problem 2 : Based on the budget method, how much would the couple need to cover their survivors’ expenses for 5 years? For 10 years? (Hint: Budget method only considers future expected expenses and current savings. Calculate how much they would need to cover their annual expenses for the desired duration. Consider future expenses and amount already in savings and specify that the savings will be used to pay off debt or pay for college etc.. Read bottom of p.384 and top of p.385 about the budget method. Note that you ignore the earnings of the couple in this method because they will be dead and gone when the expenses need to be paid.)

Show your work, for each type of expense and double-check your addition and subtraction to get your two answers, please.

Solution/Final Recommendation: