Question

# Figure 2-1 Antonio and Trina are a young couple with two small children, Jason (age four)...

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.

 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?

 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

 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