Sue and Tom Wright are assistant professors at the local university. 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?
To calculate how much the Wrights would need in the family maintenance fund if Sue were to die today, we need to consider their current take-home pay, expenses, and the needs of the remaining family members.
1. Current take-home pay: Sue and Tom each take home around $42,000 per year after taxes. So their combined take-home pay is $42,000 x 2 = $84,000 per year.
2. Calculating the needs: If Sue were to die, the remaining family members would need 75% of the current combined take-home pay to maintain their standard of living. So, 75% of $84,000 per year is 0.75 x $84,000 = $63,000 per year.
3. Child-care expenses: In a single-parent household, there would be an additional $400 per month in child-care expenses. So, $400 x 12 = $4,800 per year.
4. Survivor's benefits: They estimate that the child support as survivors' benefits would total about $1,200 per month. So, $1,200 x 12 = $14,400 per year.
5. Total needs: To calculate the annual needs, we add the required annual income ($63,000) with the additional child-care expenses ($4,800) minus the survivors' benefits ($14,400). So, $63,000 + $4,800 - $14,400 = $53,400 per year.
6. Family maintenance fund: The family maintenance fund should cover the needs until the children are no longer dependent, which in this case is until both children reach 18 years of age. So, we need to calculate the total need until the youngest child turns 18. Assuming both children are currently 11 and 9 years old, we need the fund for 18 - 9 = 9 years.
7. Calculating the total family maintenance fund: Multiply the annual need ($53,400) by the number of years (9) to get the total family maintenance fund required. So, $53,400 x 9 = $480,600.
Therefore, if Sue Wright were to die today, the Wrights would need a family maintenance fund of $480,600 to maintain their current standard of living while the children are still dependent.
To search for protection to close the $50,000 life insurance protection gap, the Wrights should follow these steps:
1. Assess individual needs: Each of them should determine their individual needs, including any debts, future expenses, and income replacement.
2. Review current coverage: They should review their existing life insurance policies and any other protection plans they have to see if they can increase coverage to close the protection gap.
3. Consult with insurance professionals: They should consult with insurance professionals such as agents or brokers who can help them understand their options, provide advice, and recommend suitable insurance products.
4. Compare quotes: They should obtain quotes from multiple insurance companies to compare premiums and coverage terms for different types of life insurance policies.
5. Evaluate policy features: They should carefully review the features of each policy, such as the death benefit, premium payment duration, flexibility, and riders (additional coverage options) that could be beneficial for their specific situation.
6. Consider affordability: They should select a policy that offers adequate coverage to close the protection gap while considering their budget and ability to pay the premiums.
7. Apply for coverage: Once they have decided on the most suitable life insurance policy, they should complete the application process, which may include providing personal and financial information, undergoing medical assessments, and paying the required premiums.
8. Review and update regularly: Insurance needs may change over time, so it's important for the Wrights to review their coverage periodically and update it if necessary to ensure adequate protection.
By following these steps, the Wrights can search for suitable life insurance protection to close the $50,000 protection gap and ensure their financial security.