- Grayson And Aubrey Reed Are A Two Income Couple In Their Early 30s They Have Two Children Ages 6 And 3 Grayson S Mont 1 (73.06 KiB) Viewed 58 times
- Grayson And Aubrey Reed Are A Two Income Couple In Their Early 30s They Have Two Children Ages 6 And 3 Grayson S Mont 2 (78.96 KiB) Viewed 58 times
Grayson and Aubrey Reed are a two-income couple in their early 30s. They have two children, ages 6 and 3. Grayson's monthly take- home pay is $3,600, and Aubrey's is $4,200. The Reeds feel that, because they're a two-income family, they both should have adequate life insurance coverage. Accordingly, they are now trying to decide how much life insurance each one of them needs. To begin with, they'd like to set up an education fund for their children in the amount of $120,000 to provide college funds of $15,000 a year-in today's dollars-for 4 years for each child. Moreover, if either spouse should die, they want the surviving spouse to have the funds to pay off all outstanding debts, including the $210,000 mortgage on their house. They estimate that they have $25,000 in consumer installment loans and credit cards. They also project that if either of them dies, the other probably will be left with about $10,000 in final estate and burial expenses. Regarding their annual income needs, Grayson and Aubrey both feel strongly that each shouldhave enough insurance to replace her or his respective current income level until the younger child turns 18 (a period of 15 years). Although neither Grayson nor Aubrey would be eligible for Social Security survivor's benefits because they both intend to continue working, both children would qualify in the (combined) amount of around $1,800 a month. The Reeds have accumulated about $75,000 in investments, and they have a decreasing term life policy on each other in the amount of $100,000, which could be used to partially pay off the mortgage. Grayson also has an $80,000 group life insurance policy at work and Aubrey a $100,000 group life insurance policy. Critical Thinking
Questions 1. Assume that Grayson's gross annual income is $54,000 and Aubrey's is $64,000. Their insurance agent has given them a multiple earnings table showing that the earnings multiple to replace 75 percent of their lost earnings is 8.7 for Grayson and 7.4 for Aubrey. Use this approach to find the amount of life insurance each should have if they want to replace 75 percent of their lost earnings. 2. Use Worksheet 8.1(attached below) to find the additional insurance needed on both Grayson and Aubrey's lives. (Because Grayson and Aubrey hold secure, well-paying jobs, both agree that they won't need any additional help once the kids are grown; both also agree that i they'll have plenty of income from Social Security and
company pension benefits to take care of themselves in retirement. Thus, when preparing the worksheet, assume "funding needs of zero in Periods 2 and 3.) 3. Is there a difference in your answers to
Questions 1 and 2? If so, why? Which number do you think is more indicative of the Reeds' life. insurance needs? Using the amounts computed in
Question 2 (employing the needs approach), what kind of life insurance policy would you recommend for Grayson? For Aubrey? Briefly explain your answers.
fx K17 C Step 1: Financial resources needed after death i 6 1. Annual living expenses and other needs: 7 8 a. Monthly living expenses b. Net yearly income needed $ 9 (ax 12) 10 c Number of years in time period 11 d. Total living need per time period (bx c) $ 12 TOTAL UIVING EXPENSES (add line d for each period): 2. Special needs 13 14 a. Spouse education fund 15 b. Children's college fund 16 c. Other needs 17 3. Final expenses (funeral, estate costs, etc.) 18 4. Debt liquidation 19 a. House mortgage $ 20 b. Other loans 21 c Total debt (4 a +4 b) 22 5. Other financial needs 23 TOTAL FINANCIAL RESOURCES NEEDED (add right column) 24 Step 2: Financial resources available after death 25 26 1. Income 27 a. Annual Social Security survivor's 28 benefits 29 b. Surviving spouse's annual income Other annual pensions and Soc. Sec. benefits 30 31 d. Annual income $ 32 e. Number of years in time period 33 f. Total period income (dx e) $ 34 TOTAL INCOME 35 2. Savings and investments 36 3. Other life insurance 37 4. Other resources 38 TOTAL FINANCIAL RESOURCES AVAILABLE (18+2+3+4) 39 Step 3: Additional Life Insurance needed 40 Step 1: Total financial resources needed 41 Step 2: Total financial resources available 42 ADDITIONAL LIFE INSURANCE NEEDED D S $ E Period 1 Period 1 - 0 F $ s $ $ $ $ $ Period 2 Period 2 . 0 H S $ $ S $ $ Period 3 Period 3 0 $ $ $ $ $ $ S $ $ $ $ $ $ $ $ $