Sue and Tom Wright are assistant professors at the local university. They each take home about $40,000 per year after taxes. Suye is 37 years of age, and tome 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 tak home pay to retain their 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 sigle-parent household. They estimate that surviviors' benefits would total about $1,000 per month in child support.
Both Tom and Sue are knowledeable investors. In the past, average after-tax returns on their investment portfolio have exceeded the rate of inflation by about 3%.
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 calculation.
2. Suppose the Wrights found that both Tome 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 that gap?
$64,228.24
1.[(40000+4000)/75%]+(50*12) 2.40000-(1000*12)3.52000-60600 4.8600*(rate*#yrs+1).There it is. All you have to do is compute the real return rate for the years off the chart. This problem is an annuity problem. We learned it in week one!
Sue and Tom Wright are assistant professors what there insurance gap
FAMILY MAINTENANCE FUND
Monthly survivors' expenses $5650
Monthly survivors' take-home pay $3500
Monthly survivors' benefits $1200
Total contribution by survivors' ($4700)
Monthly maintenance requirement $950
x12
Annual maintenance requirement $11,400
Multiply by annuity factor
Term of Fund (years) 7
Annual Real Return 3%
Annual Factor 7.6625
Family maintenance fund $87,352.50
Sorry that was not the right numbers, but the right set up. Let me do it with your numbers. the combined income is $80,000 x .75=60,000/12=5000, add the 50 for childcare and get 5050 for monthly survivors expense.
Take home pay of survivor- divide 40,000 by 12=3333.33 + survivors benefits = 1000 add to take home pay = 4333.33 take that away from the monthly expenses of 5050 = 716.67 x 12 = 8600.04. Then you have 7 yrs at 3% = and annuity factor of 7.6625 x 8600.04 = 65897.81 for the family maintenance fund. And then set it up like above. Hope this helps
1. To calculate the amount needed in the family maintenance fund if Sue Wright were to die today, we will use the "needs approach." Here are the steps to calculate it:
Step 1: Calculate the current combined take-home pay of Sue and Tom:
Sue and Tom each take home about $40,000 per year after taxes. So their current combined take-home pay is $40,000 + $40,000 = $80,000 per year.
Step 2: Determine the percentage of the combined take-home pay needed to maintain their current standard of living:
The question states that if one of them were to die, the remaining family members would need about 75% of the present combined take-home pay to retain their current standard of living. Therefore, we need to calculate 75% of $80,000.
75% of $80,000 = 0.75 x $80,000 = $60,000
So, they would need $60,000 per year to maintain their current standard of living.
Step 3: Calculate the number of years the children are still dependent:
The ages of the children are given as 13 and 11. Let's assume that when they turn 18, they are no longer dependent. Therefore, the number of years the children are still dependent is 18 - 13 = 5 years.
Step 4: Calculate the total amount needed in the family maintenance fund:
To find the total amount, we multiply the annual amount needed by the number of years the children are still dependent.
Total amount needed = $60,000 per year x 5 years = $300,000
So, if Sue Wright were to die today, the Wrights would need $300,000 in the family maintenance fund to maintain their current standard of living while the children are still dependent.
The calculation is based on the assumption that the expenses remain constant, without accounting for inflation or any changes in income.
2. To search for protection to close the life insurance protection gap of $50,000 for both Sue and Tom, the Wrights should follow these steps:
Step 1: Evaluate their current life insurance coverage:
Examine their existing life insurance policies and check the coverage amounts. Determine if any existing policies have a death benefit that would cover the protection gap, or if adjustments can be made to the existing policies to close the gap.
Step 2: Research the different types of life insurance policies:
Understand the various types of life insurance policies available, such as term life insurance and permanent life insurance (whole life or universal life). Compare the features, benefits, and costs of each type to determine which policy best suits their needs.
Step 3: Determine the appropriate coverage amount:
Consider factors like outstanding debts, future financial goals, and the needs of the remaining family members. Calculate the amount of coverage needed to close the $50,000 protection gap. It's important to consider any additional expenses, such as mortgage payments, education costs, and other financial obligations.
Step 4: Obtain life insurance quotes:
Contact multiple insurance providers to obtain quotes for the desired coverage amount. Provide the necessary information, such as age, health condition, and desired policy term, to receive accurate quotes.
Step 5: Compare quotes and policy terms:
Compare the quotes received from different insurance providers, taking into account the policy terms, premium costs, and coverage amounts offered. Evaluate the financial strength and reputation of the insurance companies.
Step 6: Apply for life insurance policies:
Select the best option that suits their needs and budget. Complete the necessary application forms, medical exams, and underwriting processes required by the insurance company. Provide accurate and honest information during the application process.
Step 7: Review and finalize the chosen policy:
Review the policy terms, including coverage amount, premium payments, and any additional riders or benefits included. Ensure that the policy adequately closes the $50,000 protection gap. Once reviewed and satisfied with the terms, finalize the policy by signing the necessary documentation.
It is recommended to consult a licensed and reputable insurance agent or financial advisor to guide them through the process and ensure they make informed decisions based on their specific needs and circumstances.