Question

Frank and Margaret (married) have two children. Frank works and earns $75,000 per year. Margaret does not work and stays home to care for the children (ages 4 and 6).

Both children will begin college at age 18. Assume that college will cost each of them $100,000. Also assume (though this is not realistic...just conservative) that the full $100,000 for each child's education will be paid up front in the year they turn 18.

Assume Margaret would like to receive the equivalent of Frank's income for the next 40 years. Assume that at the end of the 40 years of continued income for Margaret, the funds will run out.

Also assume that each child will get married at age 25 and the cost of each wedding will be $20,000. Frank wants an insurance policy that will cover all of these needs. Using the needs-based approach, estimate the current (PV) value of all of the family's future needs as an insurance death benefit amount. Assume a 6% discount rate.  

  

$3,000,000

   

$1,234,892

   

$3,240,000

   

$1,128,472

Answer 1

$1,234,892

First, we calculate the Present value of Frank's Income for 40 years

Using a financial calculator

FV = 0

PMT = 75000

N = 40

I/Y = 6

cpt PV, we get PV = 1128472.27

PV of Frank's income = $1128472

Time remaining for children's education = (18-4) and (18-6) years = 14 and 12 years

PV of educational funds of children = (100000/(1.06^14)) + (100000/(1.06^12))

PV of educational funds of children = $93927

Time remaining for children's wedding = (25-4) and (25-6) years = 21 and 19 years

PV of educational funds of children = (20000/(1.06^21)) + (20000/(1.06^19))

PV of educational funds of children = $12493

Total current (PV) value of all of the family's future needs = PV of Frank's income + PV of educational funds of children + PV of educational funds of children

Total current (PV) value of all of the family's future needs = $1128472 + $93927 + $12493 = $1234892.67