Question

Pat estimates that $60,000 is seen as sufficient wealth to meet his family’s needs after his death. Currently, the family has $800,000 total assets, including bank saving, securities investment, house, cars, etc. The family currently has $220,000 total liability (e.g., mortgage payoff, auto loan, credit card balance), $135,000 cash needs (e.g., emergency fund, educational fund, and final expenses), and $145,000 non-income-producing capital. Ignore any other potential capital resources or needs, e.g., Social Security benefits.

    Assuming a 5% rate of return, how much life insurance does the Capital Retention Approach suggest? Again, please show all your work and calculations so you can receive partial credit even if you make a mistake. The appearance of your homework is a factor in your grade; therefore, it is suggested it be presented in a professional manner.)

Answer 1

Step 1: Calculate Current Income Producing Capital

The value of current income producing capital is calculated as below:

Total Assets	800,000
Less Total Current Liability	-220,000
Cash Needs	-135,000
Non-Income-Producing Capital	-145,000
Current Income Producing Capital	$300,000

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Step 2: Calculate Amount of Additional Capital Needed

The amount of additional capital needed to achieve desired income of $60,000 is arrived as below:

Amount of Additional Capital Needed = Desired Income - Current Income Producing Capital*Rate of Return = 60,000 - 300,000*5% = $45,000

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Step 3: Calculate Amount of Life Insurance Needed to Achieve a Desired Income of $60,000

The amount of life insurance needed to achieve a desired income of $60,000 is calculated as follows:

Amount of Life Insurance Needed = Amount of Additional Capital Needed/Rate of Return = 45,000/5% = $900,000 (answer)