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?
I guess I am having a hard time understanding how to go about this....thanks.
To determine how much the Wrights would need in the family maintenance fund if Sue were to die today, we need to follow the "needs approach." This approach takes into account the family's current standard of living and calculates the amount required to maintain that standard in the event of a death.
Step 1: Calculate the current combined take-home pay of Sue and Tom. We know that they each take home about $40,000 per year after taxes. So their current combined take-home pay is $40,000 + $40,000 = $80,000.
Step 2: Determine the percentage of the combined take-home pay the remaining family would need to maintain their current standard of living. According to the information given, they estimate needing 75% of the present combined take-home pay. So, 75% of $80,000 is 0.75 * $80,000 = $60,000.
Step 3: Add any additional expenses that would be required in a single-parent household. In this scenario, an extra $50/month in child-care expenses would be needed. So, for one year, the additional child-care expenses would be $50 * 12 = $600.
Step 4: Subtract the estimated survivors' benefits from the total amount calculated. The survivors' benefits are estimated to be $1,000 per month in child support, which amounts to $1,000 * 12 = $12,000 per year.
Step 5: Add the child-care expenses and subtract the survivors' benefits from the calculated amount needed. $60,000 + $600 - $12,000 = $48,600.
Therefore, if Sue were to die today, the Wrights would need approximately $48,600 in the family maintenance fund to retain their current standard of living.
Now, let's consider the steps the Wrights should follow to search for protection to close the $50,000 life insurance protection gap.
Step 1: Determine the current life insurance coverage. The protection gap represents the difference between the current life insurance coverage and the amount needed.
Step 2: Assess the need for life insurance. Consider the financial obligations that would need to be covered in the event of a death, including funeral expenses, outstanding debts, mortgage or rent payments, children's education, and ongoing living expenses.
Step 3: Calculate the additional coverage required. Subtract the current life insurance coverage from the amount needed, which in this case is $50,000.
Step 4: Research and compare life insurance options. Look for policies that provide the necessary coverage to close the protection gap. Consider factors such as the type of insurance (term or permanent), coverage amount, premiums, and any riders or additional benefits offered.
Step 5: Obtain quotes and review policy details. Request quotes from different insurance companies and compare their offerings. Review the policy details carefully, including any exclusions, limitations, and requirements.
Step 6: Apply for the selected life insurance policy. Complete the necessary application forms and provide any required documentation. Be prepared to undergo a medical examination or provide medical records if necessary.
Step 7: Review and accept the policy. Once the application is processed, review the policy documents to ensure they align with your expectations and needs. If satisfied, accept the policy and arrange for payment of premiums.
Following these steps will help the Wrights determine their life insurance needs and find suitable protection to close the $50,000 protection gap. It's recommended to consult with a financial advisor or insurance professional to get personalized advice for their specific situation.