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 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 single-parent household. They estimate that survivors' benefits would total about $1,000 per month in child support.
Both Tom and Sue are knowledgeable investors. In the past, average after-tax returns on their investment portfolio have exceeded the rate of inflation by about 3%.
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.
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 that gap?
SHOW ALL WORK FOR EACH ASSIGNMENT AND EXPLAIN EACH STEP CAREFULLY
To calculate the amount needed in the family maintenance fund if Sue Wright were to die, we need to follow the "needs approach." This approach takes into consideration the ongoing expenses and future needs of the surviving family members.
Step 1: Calculate the present combined take-home pay
Sue and Tom each take home about $40,000 per year after taxes. So, their present combined take-home pay is $40,000 * 2 = $80,000.
Step 2: Determine the percentage of the present combined take-home pay needed
The remaining family members would need about 75% of the present combined take-home pay to retain their current standard of living. Therefore, the amount needed is $80,000 * 75% = $60,000 per year.
Step 3: Consider additional expenses
We need to include the additional $50/month in child-care expenses required in a single-parent household. So, the annual additional expense is $50/month * 12 months = $600.
Step 4: Subtract survivors' benefits
Survivors' benefits would total about $1,000 per month in child support. Therefore, the annual survivors' benefit is $1,000/month * 12 months = $12,000.
Step 5: Calculate the total amount needed in the family maintenance fund
The total amount needed in the family maintenance fund is the sum of the present combined take-home pay needed ($60,000), the additional child-care expenses ($600), and the subtracted survivors' benefits ($12,000). Thus, the total amount needed is $60,000 + $600 + $12,000 = $72,600 per year.
Now, let's move on to the steps the Wrights should take to search for protection to close the $50,000 life insurance protection gap.
Step 1: Determine the specific protection needed
The Wrights need to close a life insurance protection gap of $50,000.
Step 2: Evaluate existing life insurance coverage
Check if either Sue or Tom has any existing life insurance coverage that can contribute towards closing the gap. If there's any, calculate the amount of coverage available.
Step 3: Calculate the additional life insurance required
The additional life insurance required to close the gap is the difference between the protection gap ($50,000) and any existing coverage.
Step 4: Evaluate insurance options
Research and compare different life insurance policies and providers to find the best coverage options that meet their needs.
Step 5: Obtain quotes and compare premiums
Request quotes from multiple insurance providers for the additional coverage needed. Compare the premiums, coverage terms, and policy features to make an informed decision.
Step 6: Apply for life insurance
Once the Wrights have chosen the most suitable insurance policy, they should complete the application process, providing the necessary information and completing any required medical examinations.
Step 7: Review and finalize the policy
Carefully review the policy terms and conditions before signing and finalizing the life insurance contract. Make sure all the details are accurate and meet the desired protection requirements.
Step 8: Pay premiums and maintain the policy
Ensure timely payment of premiums to keep the life insurance policy active. Regularly review the coverage to ensure it remains adequate as the family's needs evolve over time.
By following these steps, the Wrights can calculate the amount needed in the family maintenance fund and search for the appropriate life insurance protection to close the protection gap.