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?

Homework Answers

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

PLEASE DO UPVOTE !

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