Question

# Howard and Millie, 28 and 26 respectively, is a young family without children. Howard works as...

Howard and Millie, 28 and 26 respectively, is a young family without children. Howard works as an engineer for a medium size manufacturing company, earning \$70,000 per year. Millie works part-time at a doctor's office, earning \$20,000 per year. They expect that their income will keep pace with inflation, which is expected to be 2% per year.

Millie does all the housework, such as cooking meals and cleaning the house. She estimates that it would cost \$18,000 to hire somebody to do (all) the housework that she is doing.

They are free spenders; they spend all their income every month, so that they have no savings. Although they want to save, they don't want to change their life style. If one of them dies; the remaining person would still need 90% of their current spending. You can ignore taxes in this question.

Howard has good benefits from his work, including group life insurance that provides a lump sum equal to three times his salary if he dies. They plan to work until age 65.

Assumptions:

- Use real dollars in your answer.

- The nominal rate of interest is 6%.

- Cash flows are at the end of the year.

- Ignore taxes.

Required:

(a) Using the Income Approach, how much life insurance does the family need?

(b) Using the Expense Approach, how much life insurance does the family need?

(1). Income Approach

 Particulars Howard (\$) Millie (\$) Retirement age 65 65 Present age 28 26 Remaining age 37 39 Yearly salary 70000 20000 Opportunity salary 0 18000 Annualy salary 70000 38000 Infliation % per year 2% 2% Insurance needed using - - Income approach 37,82,398 22,13,015

Hence insurance needed to the family using income approach is \$ 59,95,413 (37,82,398 + 22,13,015)

(2). Expensea Approach

 Total income of the family 90,000 (70000 + 20000) Total Expenses they required 90,000 - Expenses required if one dies 81,000 - Average age remaining for retirement 38 (37+39)/2 Nominal rate of interest 6% - Insurance needed 1,10,08,241 -

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