Hi,

My name is Franklin. I have a question on financial investment.
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%.
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 protedtion gap of $50,0000, Present the steps in sequence how Wrights should proceed to search for protection to close that gap?

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If you read the book you will understand that gap insurance is only the needed added protection, so how would you recommend them to gap that 50K?

Im stuck on this same question. I totally understand about the first part but the 2nd part and the gap insurance is just way over my head. Is this asking how they could match the 50k coverage or is it saying that in the event that Tom has an outstanding loan with bank X for 100,000 and the gap insurance will cover only 50k of that how would the family cover the remaining 50k? This is such a good course to take but wow is this stuff confusing.

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Hi Franklin,

I'd be happy to help you with your questions on financial investment. Let's break down each question and go through the steps to find the answers.

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.

To calculate the amount needed in the family maintenance fund if Sue were to die today, we will use the "needs approach." This approach takes into consideration the financial needs of the remaining family members to maintain their current standard of living.

Step 1: Calculate the present combined take-home pay:
- Sue and Tom each earn $40,000 per year after taxes, so their present combined take-home pay is $80,000 ($40,000 + $40,000).

Step 2: Determine the percentage of the present combined take-home pay needed:
- The question states that the family would need about 75% of the present combined take-home pay to retain their current standard of living while the children are still dependent.
- 75% of $80,000 is $60,000 (75% x $80,000).

Step 3: Consider additional child-care expenses:
- In a single-parent household, an extra $50/month in child-care expenses would be required.
- Since this amount would not be necessary in the current two-parent household, we do not need to factor it into the family maintenance fund calculation.

Step 4: Calculate the total amount needed in the family maintenance fund:
- The total amount needed is the amount calculated in Step 2, which is $60,000.

Therefore, if Sue were to die today, the Wrights would need $60,000 in the family maintenance fund to maintain their current standard of living while the children are still dependent.

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 the Wrights should proceed to search for protection to close that gap.

To close the $50,000 life insurance protection gap for both Tom and Sue, the Wrights should follow these steps in sequence:

Step 1: Assess their life insurance needs:
- Determine the amount of life insurance coverage required to meet their financial obligations and protect their family's future.
- Consider factors such as outstanding debts, mortgage, final expenses, and future expenses like education costs for their children.

Step 2: Compare quotes from different insurance providers:
- Shop around and request quotes from multiple insurance companies to find the best coverage options at competitive rates.
- Consider factors like the coverage amount, premium costs, policy terms, and any additional benefits or riders.

Step 3: Evaluate the financial strength and reputation of the insurance providers:
- Check the financial strength rating of the insurance companies to ensure they are financially stable and capable of fulfilling claim obligations.
- Read reviews and consider recommendations from trusted sources to assess the company's reputation for customer service and reliability.

Step 4: Review and understand the policy terms and conditions:
- Carefully read through the policy documents and understand the coverage details, exclusions, policy term, premium payments, and any other relevant terms and conditions.
- Seek clarification from the insurance provider or a financial advisor if there are any uncertainties or concerns.

Step 5: Make an informed decision and purchase the life insurance policies:
- Based on the assessment of their needs, quotes received, financial strength evaluation, and policy understanding, the Wrights should select the most suitable life insurance policies.
- Complete the application process, submit the required documentation, and make the premium payments to secure the insurance coverage.

Step 6: Regularly review and update the life insurance coverage:
- Life circumstances and financial situations change over time, so it's essential to review the life insurance coverage periodically.
- Reassess the coverage needs and make adjustments accordingly, ensuring that the protection continues to address any future gaps.

Following these steps will help the Wrights search for protection and close the $50,000 life insurance protection gap for both Tom and Sue.

I hope this helps! Let me know if you have any further questions or need more clarification.