Question

Joetta Hernandez is a single parent with two children and earns ​$57,100 a year. Her​ employer's group life insurance policy would pay 2.5 times her salary. She also has

​$76,133 saved in a​ 401(k) plan, ​$6,344 in mutual​ funds, and a $3,807 certificate of deposit. She wants to purchase term life insurance for 15​ years, until her youngest child is​ self-supporting. She is not concerned about her outstanding​ mortgage, as the children would live with her sister in the event of​ Joetta's death. Assuming she can receive a 2 percent​ after-tax, after-inflation return on insurance​ proceeds, use the earnings multiple method to calculate her insurance need. How much more insurance does Joetta need to​ buy? What other information would you need to know to use the needs approach to calculate​ Joetta's insurance​ coverage?

Assuming she can receive a 2 percent​ after-tax, after-inflation return on insurance proceeds and using the earnings multiple​ method, Joetta's insurance need is ​$_______. ​(Round to the nearest​ dollar.)

How much more insurance does Joetta need to​ buy? What other information would you need to know to use the needs approach to calculate​ Joetta's insurance​ coverage?  ​(Select the best choice​ below.)

A. Joetta needs to buy ​$685,683 of insurance. Since Joetta is a single​ parent, some needs included in the needs approach method are not relevant. To use this​ method, Joetta would need specific information on projected amounts for cleanup​ funds, debt elimination funds excluding the​ mortgage, educational expenses for the​ children, and the availability of Social Security to assist with dependency expenses. Joetta can also consider the effect of existing assets to reduce the amount of insurance needed.

B. Joetta needs to buy $400,183 of insurance. Since Joetta is a single​ parent, some needs included in the needs approach method are not relevant. To use this​ method, Joetta would need specific information on projected amounts for cleanup​ funds, debt elimination funds excluding the​ mortgage, educational expenses for the​ children, and the availability of Social Security to assist with dependency expenses. Joetta can also consider the effect of existing assets to reduce the amount of insurance needed.

Answer 1

The given salary is $57,100

There is a drop of 26% for two surviving members

Required insurance amount

= Annual salary x ( 1 - 26% ) x PVIFA (2%, 15 years)

= $57,100 x (74%) x 12.84926

= $542,933

Existing insurance = 2.5 x $57,100 = $142,750

Extra insurance to be brought = $542,933 - $142,750 = $400,183

For calculation of insurance under needs approach we need, the clean-up funds, debt elimination (except the mortgage), education expenses for children, availability of social security to assist survivors

So answer is Option B