Problem 11.3 -- Kelly is a 35 year old single parent with a one-year-old son. She earns $45,000 a year as a marketing analyst and has employer paid group life insurance worth twice her annual salary. She also participates in her employer’s 401(k) program. She has the following financial assets:

· Checking account $2,000

· IRA Account $8,000

· 401(k) plan $25,000

· Individual life insurance $25,000

· Group life insurance $90,000

Her identified financial needs and objectives include:

· Funeral costs and uninsured medical costs $10,000

· Income support for her son $150,000

· Pay off car loan and credit cards $15,000

· College education fund for her son $150,000

Required:

1. Ignoring Social Security, how much life insurance do you recommend that Kelly purchase to meet her financial needs and objectives?

2. How much of the insurance need would you recommend be term life and how much should be permanent life insurance?

3. If Social Security will pay an $800 per month survivor benefit to Kelly’s son until he is 18 years old (for then next 17 years), how much life insurance do you recommend that Kelly purchase to meet her financial needs and objectives?

4. Format your analysis carefully and show your calculations.

I need help answering these questions

To determine the recommended amount of life insurance for Kelly to meet her financial needs and objectives, we will calculate the total amount needed for each objective and add them together.

1. Funeral costs and uninsured medical costs:
Kelly needs $10,000 for funeral costs and uninsured medical costs.

2. Income support for her son:
Kelly should consider the future income needed for her son's support until he reaches 18 years old. The income support needed is $150,000.

3. Pay off car loan and credit cards:
Kelly needs $15,000 to pay off her car loan and credit cards.

4. College education fund for her son:
Kelly wants to have $150,000 set aside for her son's college education.

Now let's calculate the recommended life insurance amount ignoring Social Security:

Total amount needed = Funeral costs + Income support + Pay off debts + College education fund
= $10,000 + $150,000 + $15,000 + $150,000
= $325,000

Therefore, we recommend that Kelly purchase $325,000 in life insurance to meet her financial needs and objectives, ignoring Social Security.

Next, let's determine how much of the insurance need should be term life and how much should be permanent life insurance.

Term life insurance provides coverage for a specific term, usually for a set number of years, while permanent life insurance provides lifelong coverage.

Term life insurance is typically more affordable, so it is suitable for covering temporary needs, such as income support and college education fund.

Permanent life insurance can be used for long-term needs, such as funeral costs and as an inheritance for her son.

Based on this, we recommend that Kelly purchase a higher portion of the insurance need as term life insurance to cover income support and college education, and a lower portion as permanent life insurance to cover funeral costs and serve as inheritance for her son.

Now let's calculate the recommended life insurance amount considering Social Security:

Considering a survivor benefit of $800 per month until Kelly's son reaches 18 years old (for the next 17 years), we can calculate the total benefit amount needed.

Total benefit amount needed = Monthly benefit * Total months
= $800 * (12 * 17)
= $163,200

This means that Kelly needs an additional $163,200 in life insurance to supplement the Social Security survivor benefit.

Therefore, the recommended life insurance amount, considering Social Security, is $325,000 + $163,200 = $488,200.

To summarize:

1. Ignoring Social Security, the recommended life insurance amount for Kelly is $325,000.
2. The recommended portion of term life insurance and permanent life insurance depends on the specific coverage needs and objectives.
3. Considering Social Security, the recommended life insurance amount for Kelly is $488,200.

To answer these questions, we will need to break down Kelly's financial needs and objectives and calculate the recommended amount of life insurance.

1. Ignoring Social Security, let's calculate the total amount of life insurance needed to meet Kelly's financial needs and objectives:

- Funeral costs and uninsured medical costs: $10,000
- Income support for her son: $150,000
- Pay off car loan and credit cards: $15,000
- College education fund for her son: $150,000

Total financial needs: $10,000 + $150,000 + $15,000 + $150,000 = $325,000

Since she already has individual life insurance of $25,000 and group life insurance of $90,000, we subtract that from the total financial needs:

Recommended life insurance amount = Total financial needs - Individual life insurance - Group life insurance
Recommended life insurance amount = $325,000 - $25,000 - $90,000
Recommended life insurance amount = $210,000

Therefore, we recommend that Kelly purchase $210,000 of life insurance to meet her financial needs and objectives, ignoring Social Security.

2. Now, let's determine how much of the insurance need should be term life and how much should be permanent life insurance. Term life insurance provides coverage for a specific period, while permanent life insurance provides coverage for a lifetime.

Term life insurance is generally cheaper, so it can be used to cover temporary financial needs. Permanent life insurance is more expensive but provides lifelong coverage and often has a cash value component.

The breakdown between term and permanent life insurance will depend on Kelly's specific financial situation and preferences. A common approach is to cover immediate financial needs (e.g., income support, debts, funeral costs) with term life insurance and long-term financial needs (e.g., college education fund) with permanent life insurance.

One possible recommendation could be:
- Term life insurance to cover income support, car loan, credit cards, and funeral costs: $150,000
- Permanent life insurance to cover college education fund: $60,000 ($210,000 - $150,000)

3. Now, let's consider the survivor benefit provided by Social Security. Kelly's son will receive an $800 per month survivor benefit until he is 18 years old, for the next 17 years. Let's calculate the lump sum amount needed to generate this monthly income for 17 years.

Monthly survivor benefit: $800
Duration: 17 years

Total survivor benefit: $800 x 12 months x 17 years = $163,200

Since Social Security will already provide this amount, we subtract it from the total financial needs calculated earlier:

Recommended life insurance amount with Social Security survivor benefit = Total financial needs - Total survivor benefit
Recommended life insurance amount with Social Security survivor benefit = $325,000 - $163,200
Recommended life insurance amount with Social Security survivor benefit = $161,800

Therefore, we recommend that Kelly purchase $161,800 of life insurance considering the survivor benefit from Social Security.

4. Make sure to format your analysis carefully and show your calculations. You can represent it as follows:

Total financial needs:
- Funeral costs and uninsured medical costs: $10,000
- Income support for her son: $150,000
- Pay off car loan and credit cards: $15,000
- College education fund for her son: $150,000

Total financial needs = $10,000 + $150,000 + $15,000 + $150,000 = $325,000

Individual life insurance: $25,000
Group life insurance: $90,000

Recommended life insurance amount ignoring Social Security:
Recommended life insurance amount = $325,000 - $25,000 - $90,000 = $210,000

Recommended breakdown between term and permanent life insurance:
- Term life insurance: $150,000
- Permanent life insurance: $60,000

Recommended life insurance amount considering Social Security survivor benefit:
Social Security survivor benefit: $800 x 12 months x 17 years = $163,200

Recommended life insurance amount with Social Security survivor benefit:
Recommended life insurance amount = $325,000 - $163,200 = $161,800

Please note that these calculations and recommendations are based on the information provided and may vary based on individual circumstances and financial goals. It is recommended to consult with a financial advisor or insurance professional to determine the most appropriate life insurance coverage.