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?
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123,000
1) To determine the amount needed in the family maintenance fund if Sue Wright were to die, we need to calculate the 75% of the present combined take-home pay of the Wrights.
The present combined take-home pay is $40,000 per year for each Sue and Tom, so the total is $40,000 + $40,000 = $80,000 per year.
75% of the present combined take-home pay is 0.75 * $80,000 = $60,000 per year.
Since the Wrights estimate that they would need this amount to retain their current standard of living, we can calculate the family maintenance fund for the remaining years until the children are no longer dependent.
Let's assume the children will be dependent for the next 7 years (until the age of 18). Multiply the annual amount by 7 to get the total family maintenance fund needed: $60,000 * 7 = $420,000.
Therefore, if Sue Wright were to die today, the Wrights would need $420,000 in the family maintenance fund to retain their current standard of living.
2) To close the life insurance protection gap of $50,000 for both Tom and Sue Wright, the Wrights should follow these steps:
Step 1: Evaluate current life insurance coverage - Determine the existing life insurance coverage for both Tom and Sue. This includes any employer-sponsored policies, group policies, and individual policies. Calculate the death benefits provided by these policies.
Step 2: Calculate the total existing coverage - Sum up the death benefits from all the existing policies to determine the total coverage available. Let's say the total coverage is $200,000.
Step 3: Assess the remaining protection gap - Subtract the total existing coverage from the desired protection gap of $50,000. In this case, the remaining gap is $50,000 - $200,000 = -$150,000. Since the total coverage exceeds the desired gap, there is no need to search for additional protection.
However, if the remaining gap was positive, the Wrights would need to proceed to the next step.
Step 4: Seek quotes from multiple insurance providers - In order to close the gap, the Wrights can search for life insurance policies that provide the necessary coverage amount. They should reach out to multiple insurance providers and request quotes for the desired amount of coverage, considering the premium costs and the terms and conditions of the policies.
Step 5: Compare options - After receiving quotes from insurance providers, the Wrights should evaluate the options available. They should consider factors such as premium costs, coverage duration, policy exclusions, and any other relevant terms. This will help them choose the most suitable policy that meets their needs and fills the protection gap.
Step 6: Apply for the selected policy - Once the Wrights have decided on a specific policy, they should proceed with the application process. This will involve completing paperwork, providing necessary documentation, and undergoing any medical examinations required by the insurance provider.
Step 7: Review and sign the policy - Upon approval, the insurance provider will issue the policy documents. The Wrights should carefully review the terms and conditions of the policy before signing and accepting it.
By following these steps, the Wrights can search for protection to close their life insurance protection gap.