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Sue and Tom Wright are assistant professors at the local university. They each take home about $40,000 per year after taxes. Sue is 37 years of age, and Tom is 35. Their two children, Mike and Karen are 13 and 11.
Were either one to die, they estimate that the remaining family members would need about 75% of the present combined take-home pay to retain the current standard of living while the children are still dependent. This does not include an extra $50/month in child-care expenses that would be required in a single parent household. They estimate the survivor's benefits would total about $1,000 per month in child support.
1) If Sue Wright was to die today, how much would the Wrights need in the family maintenance fund? Use the "needs approach" and explain the reasons behind your calculations.
2) Suppose the Wrights found that both Tom and Sue had a life insurance protection gap of %50,000. Present the steps in sequence how Wrights should proceed to search for protection to close the gap?
how did you find the answer?
To answer question number 1, we need to calculate the amount needed in the family maintenance fund if Sue were to die today. The "needs approach" takes into account the expenses the family would have to cover in case of Sue's death.
Step 1: Calculate the present combined take-home pay for Sue and Tom.
Given that Sue and Tom each take home about $40,000 per year after taxes, their combined take-home pay is $40,000 + $40,000 = $80,000 per year.
Step 2: Determine the percentage of the present combined take-home pay the family would need to retain their current standard of living.
According to the information provided, the family would need about 75% of the present combined take-home pay to maintain their standard of living in case of the death of either Sue or Tom.
Step 3: Calculate the amount needed in the family maintenance fund if Sue were to die.
If Sue were to die, the family's combined take-home pay would reduce by 75%, which is $80,000 x 0.75 = $60,000 per year.
Therefore, the family would need $60,000 in the family maintenance fund if Sue were to die today.
To answer question number 2, we need to present the steps in sequence for the Wrights to search for protection to close the life insurance protection gap of $50,000 for Tom and Sue.
Step 1: Assess the existing life insurance coverage.
The Wrights should review their existing life insurance policies to determine the coverage amounts and if they can bridge the gap partially or completely.
Step 2: Calculate the total life insurance needed.
Add up the total financial obligations that would need to be covered in case of the death of Tom or Sue. This might include mortgages, debts, future education expenses for the children, and any other significant financial responsibilities.
Step 3: Determine the affordability and budget.
Evaluate their budget and financial ability to pay for life insurance premiums. It's important to consider their current income, expenses, and savings.
Step 4: Shop around for life insurance quotes.
Contact multiple insurance providers and request quotes for the required coverage amount. Compare the quotes to find the best fit in terms of coverage and affordability.
Step 5: Review the policy details and terms.
Carefully read the policy details including coverage limits, premiums, exclusions, and terms. Make sure it aligns with the family's needs and requirements.
Step 6: Apply for life insurance.
After selecting the preferred life insurance policy, follow the application process provided by the insurance provider. This may involve submitting personal and medical information, undergoing a medical exam, and paying the required premiums.
It's important to note that the answer to question 2 involves a step-by-step process, and the Wrights need to go through these steps to find the appropriate protection to close their life insurance protection gap.
How did I find the answer? I used the provided information and applied the appropriate steps and knowledge related to personal finance and life insurance to answer the questions.