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? Both are knowledgable investors. In the past average after-tax returns on their investment portfolio have exceeded the rate of inflation by about 3%.
If Sue were 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 they found that both Tom & Sue had a life insurance protection gap of $50,000. Present the steps in sequence how they should proceed for the protection to close the gap?

What a great set of questions for YOU to explore! :-)

Please check your sources and tell us what you figure out. We'll be glad to critique and comment on your answers.

ji

I currently have this question. I figured it to be $64,228.24 for part one. You can use this figure to compare to yours.

1) To calculate the amount needed in the family maintenance fund if Sue Wright was to die today, we'll use the needs approach. The needs approach considers the income replacement needed to maintain the family's standard of living, as well as any additional expenses that arise.

First, let's calculate the present combined take-home pay of Sue and Tom Wright, which is $40,000 per year for each of them after taxes. This means their total combined take-home pay is $80,000 per year.

Next, we estimate that the remaining family members would need about 75% of the present combined take-home pay to retain the current standard of living. Thus, the required income replacement would be 75% of $80,000, which is $60,000 per year.

Furthermore, we need to consider the additional expense of $50/month in child-care expenses in a single-parent household. This amounts to $600 per year.

Lastly, we need to consider the survivor's benefits of $1,000 per month in child support that the Wrights would receive. This amounts to $12,000 per year.

To calculate the amount needed in the family maintenance fund, we add the income replacement amount, additional child-care expenses, and survivor's benefits:

Family maintenance fund = Income replacement + Additional child-care expenses - Survivor's benefits
Family maintenance fund = $60,000 + $600 - $12,000
Family maintenance fund = $48,600

Therefore, if Sue Wright was to die today, the Wrights would need approximately $48,600 in the family maintenance fund to retain their current standard of living.

2) In order to close the $50,000 life insurance protection gap for both Tom and Sue Wright, they should follow the following steps:

Step 1: Assess their current life insurance coverage: Tom and Sue should review their existing life insurance policies to determine if any existing coverage can help close the protection gap. They should consider the death benefit amount and the premiums they are paying.

Step 2: Calculate the additional life insurance needed: Using the needs approach, Tom and Sue should calculate the additional life insurance coverage they need to close the gap. This can be done by considering their outstanding debts, future income replacement needs, education expenses for their children, and any other financial obligations they have.

Step 3: Research and compare life insurance options: Tom and Sue, being knowledgeable investors, should research and compare different life insurance options available in the market. They should consider factors such as the type of life insurance (term or permanent), the coverage amount, the premium cost, and any additional benefits or riders offered.

Step 4: Obtain quotes from multiple providers: Tom and Sue should obtain quotes from multiple life insurance providers to compare the cost and coverage options. They can use online insurance comparison tools or consult with insurance agents to gather quotes.

Step 5: Evaluate the financial strength of the insurance company: It is important for Tom and Sue to assess the financial stability and reputation of the insurance company they are considering. They can check the ratings of the insurance company from rating agencies like A.M. Best, Moody's, or Standard & Poor's.

Step 6: Consider the investment performance: Since Tom and Sue have a history of exceeding inflation-adjusted returns on their investment portfolio, they should also consider the investment component of certain life insurance policies, such as cash value accumulations in permanent life insurance policies.

Step 7: Review and finalize the selected life insurance policy: Once Tom and Sue have gathered all the necessary information and compared their options, they should review the details of the chosen life insurance policy. They should ensure that the policy provides sufficient coverage to close the $50,000 gap and aligns with their financial goals and risk tolerance.

Step 8: Apply for the selected life insurance policy: Tom and Sue should proceed to apply for the selected life insurance policy by completing the necessary application forms and providing any required medical or financial information. They may need to undergo a medical examination or provide relevant documents as part of the underwriting process.

Step 9: Review and adjust regularly: After obtaining the life insurance coverage, Tom and Sue should periodically review their coverage to ensure that it still meets their needs. Life events such as the birth of another child, changes in income, or significant financial obligations may require adjustments to their coverage.

By following these steps, Tom and Sue can effectively search for protection to close the $50,000 life insurance protection gap and achieve their financial goals.