They each take home about $42,000 per year after taxes. Sue is 37 years of age, and Tom is 35. Their two children, Mike and Karen, are 11 and 9.
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 $400/month in child-care expenses that would be required in a single-parent household. They estimate that survivors' benefits would total about $1,200 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.
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To determine how much the Wrights would need in the family maintenance fund if Sue were to die today, we can use the needs approach. Here are the steps to calculate it:
Step 1: Calculate the present combined take-home pay:
Sue and Tom each take home about $42,000 per year after taxes, so their present combined take-home pay is $42,000 * 2 = $84,000 per year.
Step 2: Calculate the annual income needed for the remaining family members to maintain their current standard of living:
Since they estimate that the remaining family members would need about 75% of the present combined take-home pay, the annual income needed is $84,000 * 0.75 = $63,000 per year.
Step 3: Adjust for the extra child-care expenses in a single-parent household:
An extra $400 per month in child-care expenses would be required in a single-parent household, which is $400 * 12 = $4,800 per year. Subtract this amount from the annual income needed: $63,000 - $4,800 = $58,200 per year.
Step 4: Calculate the additional income needed from survivors' benefits:
They estimate that survivors' benefits would total about $1,200 per month in child support, which is $1,200 * 12 = $14,400 per year. Add this amount to the adjusted annual income needed: $58,200 + $14,400 = $72,600 per year.
Step 5: Calculate the capital needed for the family maintenance fund:
To calculate the capital needed, divide the annual income needed by the average after-tax returns on their investment portfolio, adjusted for inflation. Since their investment portfolio has exceeded the rate of inflation by 3%, we need to add 3% to the inflation rate. Assuming an inflation rate of 2%, the average after-tax rate of return is 2% + 3% = 5%. Divide the annual income needed by this rate: $72,600 / 0.05 = $1,452,000.
Therefore, if Sue Wright was to die today, the Wrights would need approximately $1,452,000 in the family maintenance fund to retain their current standard of living.
Now let's move on to the second question about closing the life insurance protection gap of $50,000 for both Tom and Sue. Here are the steps in sequence to search for protection:
Step 1: Determine the insurability of Tom and Sue:
Check if Tom and Sue are insurable, meaning whether they are eligible for life insurance based on their health conditions, age, and other factors.
Step 2: Assess their life insurance needs:
Determine the appropriate amount of life insurance coverage needed to protect their family's financial security. This should include any outstanding debts, funeral expenses, future income replacement, and other financial obligations.
Step 3: Shop for life insurance policies:
Research different life insurance policies from various insurance companies. Compare the coverage options, premiums, terms, and benefits offered. Consider working with an independent insurance agent who can provide unbiased advice and help you navigate through different policies.
Step 4: Apply for life insurance policies:
Once Tom and Sue have chosen the most suitable policies, they should complete the application process, which may include providing personal and health-related information, undergoing medical exams, and submitting any required documents.
Step 5: Review and compare policy proposals:
After receiving policy proposals from insurance companies, review and compare them in detail. Pay attention to the coverage amounts, premium rates, policy terms, exclusions, and any additional benefits or riders offered.
Step 6: Select and purchase the life insurance policies:
Based on the review and comparison, select the life insurance policies that best meet their needs and budget. Complete the necessary paperwork and make the premium payments to finalize the purchase.
Step 7: Regularly review and update the life insurance coverage:
Keep reviewing the life insurance coverage periodically to ensure it aligns with their changing life circumstances, such as marriage, children, home purchase, career advancements, or changes in financial obligations. Consider increasing coverage when necessary.
By following these steps, the Wrights can search for suitable life insurance policies to close the $50,000 protection gap for both Tom and Sue.