Question

Figure 2-1

Antonio and Trina are a young couple with two small children, Jason (age four) and Claudia (age two). Trina is an account executive for a brokerage firm while Antonio has taken a couple years off from his profession as a civil engineer to work on an MBA degree. Right now Antonio and Trina's budget is very tight, as they are accustomed to living on two incomes, but Trina's employer has just circulated employer benefit information, so Antonio and Trina believe this is a good time to evaluate their life insurance needs. They have listed the financial information they believe is relevant.

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Current life insurance (Antonio)	$ 75,000
Current life insurance (Trina)	$ 50,000
Assets available for living expenses	0
Present value of Social Security benefits if Antonio dies	$132,397
Present value of Social Security benefits if Trina dies	$151,905
Antonio's income before he went back for the MBA	$ 45,000
Trina's income	$ 50,000
Percent of income that needs to be replaced	75 percent
Projected final expenses	$7,000
Projected readjustment-period needs	$5,000
Projected debt-repayment needs	$ 15,000
Projected college-expenses	$ 80,000
Number of years income replacement is needed	20
Assumed rate of return on invested funds	5 percent
Appropriate interest rate factor	12.5

2. Refer to Figure 2-1. Using the needs-based approach, how much additional life insurance is needed on Antonio’s life using his former income?

3.Refer to Figure 2-1. Using a 7-year multiple-of-earnings approach, how much additional life insurance is needed on Trina's life?

Answer 1

Answer2.

Needs Based Approach
Calculation of Additional Life Insurance – on Antonio’s Life
No.	Financial Description	Amount (in $)
1	Projected Final Expenses	7,000
2	Projected Re-adjustment Period Needs	5,000
3	Projected Debt Repayments Needs	15,000
4	Projected College Expenses	80,000
5	Adjusted Antonio’s Income (45,000 × 75% × 12.5)	421,875
6	Less: PV of SS benefits if Antonio dies	(132,397)
7	Less: Antonio’s Current Life Insurance	(75,000)
	∴ Additional Life Insurance	321,478

Answer3.

Under the 7-year multiple-of-earnings approach, Additional Life insurance needed on Trina's life = [Trina’s Income × Appropriate interest rate factor] – Trina’s Current Life Insurance; = $(50,000 × 12.5) – $50,00 = $625,000 – $50,000 = $575,000

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