Your friend John asks you for advice concerning life insurance. John is 28 years

Question

Your friend John asks you for advice concerning life insurance. John is 28 years old and graduated from law school last year. He currently earns $48,000 per year. John must begin paying back his student loan this month. His monthly payment will be $400 per month for the next fiveyears at an interest rate of5% per year. John is married and has one child, Billy, age 3 John's wife, Mary, is a professor who currently earns $58,000 per year. Mary is 32 years old John and Mary pay $1,200 per month for their home mortgage, which will be paid off in 25 years. The interest rte on their mortgage is 6.5%. (Their current equity in the home is $40,000.) The co uple owns two cars, both 10 years old, and personal property ( such as clothes electronics, furniture, etc.,) valued at $45,000. Their investments include checking, savings, and mutual fund accounts equal to S25,000. John has no life insurance. Mary has $150,000 of life insurance provided by her employer. Mary's pension plus social security are expected to total S25,000 per year, beginning when she is 65 years old. If John should die, Mary would receive approximately $10,000 per year from social security until Billy reaches age 18 John, Mary, and Billy live comfortably on their current family income. As a matter of fact, the family has been saving about $400 per month. However, this amount is expected to now be required to make John's school loan payment. Their investments earn approximately 5% per year. Given that John and Mary both enjoy flexible work schedules, they are able to raise Billy without the help of a babysitter or nanny. John picks up Billy from school on Tuesdays and Thursdays and Mary picks him up on Mondays, Wednesdays and Fridays. John is worried about what may happen to his family is he should die. He is considering the purchase of life insurance and asks your advice Assuming neither John nor Mary will receive large inheritances, how much lif insurance do you think John needs? Calculate the amount using the needs approach. Show all calculations and explain your answer. Make any assumptions a. u believe are reasonable, and make sure your assumptions are clearly stated. Also indicate the type of insurance you would recommend, whole life or term. If you recommend term, specify the length of the term policy

Explanation / Answer

A) Calculation of Insurance value based on Needs Approach

1,603,750

A Term Insurance plan will be more suitable to John and Mary, as it will provide sufficient death benefits at affordable premium cost.

The length of Term Insurance should be at least 33 years till the retirement of Mary.

Immediate needs Student loan 24000 Mortgage 360000 Half of annual Savings till john's retirement at the age of 65 88800 Ongoing income needs John's and Mary's salary till their retirement at the age of 65 3690000 Total (a) ($) 4,162,800 Available Funds Mary's annual salary till her retirement at the age of 65 1914000 Home value 40000 Cars & personal propery 45000 Investments 25000 Interest on Investments till John's retirement at the age of 65 46250 Half of annual Savings 88800 Billy Social Security till his 18th birthday 150000 Mary's pension for 10 years 250000 Total (b) ($) 2,559,050 Estimate of Insurance needs ($) (a)-(b)

1,603,750

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.