Joetta Hernandez is a single parent with two children and earns $59,900 a year.
ID: 2796637 • Letter: J
Question
Joetta Hernandez is a single parent with two children and earns $59,900 a year. Her employer's group life insurance policy would pay 2.5 times her salary. She also has $79,867 saved in a 401(k) plan, $6,656 in mutual funds, and a $3,993 CD. She wants to purchase term life insurance for 15 years until her youngest child is self-supporting. She is not concerned about her outstanding mortgage, as the children would live with her sister in the event of Joetta's death. Assuming she can receive a 44 percent after-tax, after-inflation return on insurance proceeds, use the earnings multiple method to calculate her insurance need. How much more insurance does Joetta need to buy? What other information would you need to know to use the needs approach to calculate Joetta's insurance coverage?
Present Value of an Annuity of $1 (PVIFA)
n
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
1
0.990
0.980
0.971
0.962
0.952
0.943
0.935
0.926
0.917
0.909
2
1.970
1.942
1.913
1.886
1.859
1.833
1.808
1.783
1.759
1.736
3
2.941
2.884
2.829
2.775
2.723
2.673
2.624
2.577
2.531
2.487
4
3.902
3.808
3.717
3.630
3.546
3.465
3.387
3.312
3.240
3.170
5
4.853
4.713
4.58
4.452
4.329
4.212
4.100
3.993
3.890
3.791
6
5.795
5.601
5.417
5.242
5.076
4.917
4.767
4.623
4.486
4.355
7
6.728
6.472
6.23
6.002
5.786
5.582
5.389
5.206
5.033
4.868
8
7.652
7.325
7.02
6.733
6.463
6.21
5.971
5.747
5.535
5.335
9
8.566
8.162
7.786
7.435
7.108
6.802
6.515
6.247
5.995
5.759
10
9.471
8.983
8.53
8.111
7.722
7.36
7.024
6.710
6.418
6.145
11
10.368
9.787
9.253
8.760
8.306
7.887
7.499
7.139
6.805
6.495
12
11.255
10.575
9.954
9.385
8.863
8.384
7.943
7.536
7.161
6.814
13
12.134
11.348
10.635
9.986
9.394
8.853
8.358
7.904
7.487
7.103
14
13.004
12.106
11.296
10.563
9.890
9.295
8.745
8.244
7.786
7.367
15
13.865
12.849
11.938
11.118
10.380
9.712
9.108
8.559
8.061
7.606
16
14.718
13.578
12.561
11.652
10.838
10.106
9.447
8.851
8.313
7.824
17
15.562
14.292
13.166
12.166
11.274
10.477
9.763
9.122
8.544
8.022
18
16.398
14.992
13.754
12.659
11.690
10.828
10.059
9.372
8.756
8.201
19
17.226
15.678
14.324
13.134
12.085
11.158
10.336
9.604
8.950
8.365
21
18.857
17.011
15.415
14.029
12.821
11.764
10.836
10.017
9.292
8.649
22
19.660
17.658
15.937
14.451
13.163
12.042
11.061
10.201
9.442
8.772
23
20.456
18.292
16.444
14.857
13.489
12.303
11.272
10.371
9.580
8.883
24
21.243
18.914
16.936
15.247
13.799
12.550
11.469
10.529
9.707
8.985
25
22.023
19.523
15.622
14.094
12.783
11.654
10.675
9.823
9.077
30
25.808
22.396
19.600
17.292
15.372
13.765
12.409
11.258
10.274
9.427
40
32.835
27.355
23.115
19.793
17.159
15.046
13.332
11.925
10.757
9.779
50
39.196
31.424
25.730
21.482
18.256
15.762
13.801
12.233
10.962
9.915
Question - Assuming she can receive a 44 percent after-tax, after-inflation return on insurance proceeds and using the earnings multiple method, Joetta's insurance need is$____________ (Round to the nearest dollar.)
Present Value of an Annuity of $1 (PVIFA)
n
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
1
0.990
0.980
0.971
0.962
0.952
0.943
0.935
0.926
0.917
0.909
2
1.970
1.942
1.913
1.886
1.859
1.833
1.808
1.783
1.759
1.736
3
2.941
2.884
2.829
2.775
2.723
2.673
2.624
2.577
2.531
2.487
4
3.902
3.808
3.717
3.630
3.546
3.465
3.387
3.312
3.240
3.170
5
4.853
4.713
4.58
4.452
4.329
4.212
4.100
3.993
3.890
3.791
6
5.795
5.601
5.417
5.242
5.076
4.917
4.767
4.623
4.486
4.355
7
6.728
6.472
6.23
6.002
5.786
5.582
5.389
5.206
5.033
4.868
8
7.652
7.325
7.02
6.733
6.463
6.21
5.971
5.747
5.535
5.335
9
8.566
8.162
7.786
7.435
7.108
6.802
6.515
6.247
5.995
5.759
10
9.471
8.983
8.53
8.111
7.722
7.36
7.024
6.710
6.418
6.145
11
10.368
9.787
9.253
8.760
8.306
7.887
7.499
7.139
6.805
6.495
12
11.255
10.575
9.954
9.385
8.863
8.384
7.943
7.536
7.161
6.814
13
12.134
11.348
10.635
9.986
9.394
8.853
8.358
7.904
7.487
7.103
14
13.004
12.106
11.296
10.563
9.890
9.295
8.745
8.244
7.786
7.367
15
13.865
12.849
11.938
11.118
10.380
9.712
9.108
8.559
8.061
7.606
16
14.718
13.578
12.561
11.652
10.838
10.106
9.447
8.851
8.313
7.824
17
15.562
14.292
13.166
12.166
11.274
10.477
9.763
9.122
8.544
8.022
18
16.398
14.992
13.754
12.659
11.690
10.828
10.059
9.372
8.756
8.201
19
17.226
15.678
14.324
13.134
12.085
11.158
10.336
9.604
8.950
8.365
21
18.857
17.011
15.415
14.029
12.821
11.764
10.836
10.017
9.292
8.649
22
19.660
17.658
15.937
14.451
13.163
12.042
11.061
10.201
9.442
8.772
23
20.456
18.292
16.444
14.857
13.489
12.303
11.272
10.371
9.580
8.883
24
21.243
18.914
16.936
15.247
13.799
12.550
11.469
10.529
9.707
8.985
25
22.023
19.523
15.622
14.094
12.783
11.654
10.675
9.823
9.077
30
25.808
22.396
19.600
17.292
15.372
13.765
12.409
11.258
10.274
9.427
40
32.835
27.355
23.115
19.793
17.159
15.046
13.332
11.925
10.757
9.779
50
39.196
31.424
25.730
21.482
18.256
15.762
13.801
12.233
10.962
9.915
Explanation / Answer
There is typo in the question, return can't be 44%, it should be 4%.
Assuming the same please find below the solution:
There is 26% drop for two surviving members.
PVIFA(i%,n yr) of 4% for 15 years = 11.118
Annual income = $59,900 = $59,900 x (1-0.26) x 11.118= $492,816
Required insurance 2.5 x $59900 = $149,750
Current insurance $492,816 – $149,750 = $343,066 needed insurance to buy
In the needs approach, you need to know the following to calculate Joetta’s needs:
Immediate needs at the time of death– cleanup funds of health cost, burial costs,inheritance taxes, estate taxes, and legal fees
Debt elimination funds– outstanding debts of credit cards, consumer debt, carloans.
Dependency expenses– family expenses while children are in school anddependent on family support.
Educational expenses for the children
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